A Case for Interest Rate Inertia in Monetary Policy

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: We argue that it is not necessary for the central bank to react to the exchange rate to have a desirable outcome in the economy. Indeed, when the Taylor rule includes contemporaneous data on the variables in the rule, the central bank can disregard from the exchange rate as long as there is enough with interest rate inertia in monetary policy. The reason is that interest rate inertia and a reaction to the current nominal exchange rate change are perfect substitutes in monetary policy. Hence, we give a rationale for the central bank to focus on the interest rate change rather than the interest rate level to have a desirable outcome in the economy, which we define as a determinate rational expectation equilibrium that is stable under least squares learning. Terms of use: Documents inJEL codes: E52; F31.

Asset Price Misalignments and Monetary Policy

“…When it comes to the degree of inertia in monetary policy, we replicate a typical finding in the literature (see Bask, , and Bullard and Mitra, ). Namely, that the region in the parameter space of ( κ x , κ π ) for which we have a determinate and stable REE increases in size when the degree of inertia increases in size (i.e., a larger κ r ).…”

“…The other two properties concern the relationship between the role of technical analysis in stock trading and the degree of inertia in monetary policy. Specifically, when technical analysis plays a minor role in stock trading, we replicate the typical finding in the literature that inertia in monetary policy promotes determinacy (see Bask, , and Bullard and Mitra, ). This is no longer true when technical analysis plays a major role in stock trading.…”

Optimal monetary policy under learning and structural uncertainty in a New Keynesian model with a cost channel and inflation inertia

“…It therefore affects the degree of inertia in monetary policy and thus, by extension, the degree of inertia in the economy in the same way that inflation inertia does. The tendency of inertia in monetary policy to improve the conditions under which a determinate and a least squares learnable REE is attainable is demonstrated inBullard and Mitra (2007),Duffy and Xiao (2007), andBask (2014).…”

International journal of finance and economics: A bibliometric overview

“…Authorities may use monetary policy to pursue price stability, economic growth, financial stability, and exchange rate stability while also considering external constraints. As a result, recent studies expand the Taylor rule by including the real exchange rate in the monetary policy reaction function (Bask, 2014; Imam, 2015).…”