url
9
Aug
2014

SIMPLE MONETARY POLICY RULES UNDER MODEL UNCERTAINTY: NOTES 4

18. The beneficial impact of interest rate smoothing extends to models that fall outside the class of models we consider here, such as the models in Woodford and Rotemberg (1997) and Rebelo and Xie (1997), that explicitly incorporate optimizing behavior of representative agents.

19. Clarida, Gali and Gertler (1997a) document the practice of interest-rate smoothing for U.S. monetary policy itat on.

20. For example, policymakers may dislike frequent reversals in interest rates, either because such changes make the policymaker look poorly informed and undermine confidence in the central bank as argued by Caplin and Leahy (1997), or because it is difficult to obtain broad-based political support for such changes in direction as suggested by Goodhart (1997). Furthermore, by avoiding large movements in interest rates the central bank can reduce financial market volatility and in doing so reduces the likelihood of instability when particular institutions incur large losses. Finally, the nature of the decision-making process may lead to caution. For example, Alan Blinder (1995), when Vice-Chairman of the Board of Governors, argued that uncertainty that policymakers have about the parameters of the underlying model justifies “stodginess” in monetary policy.

21. TAYMCM and FRB also include an explicit exchange rate channel of monetary policy and FRB includes a channel for wealth, which is negatively related to long-term real interest rates.

18. The beneficial impact of interest rate smoothing extends to models that fall outside the class of models we consider here, such as the models in Woodford and Rotemberg (1997) and Rebelo and Xie (1997), that explicitly incorporate optimizing behavior of representative agents. 19. Clarida, Gali and Gertler (1997a) document the practice of interest-rate smoothing for U.S. monetary policy itat on. 20. For example, policymakers may dislike frequent reversals in interest rates, either because such changes make the policymaker look poorly informed and undermine confidence in the central bank as argued by Caplin and Leahy (1997), or because it is difficult to obtain broad-based political support for such changes in direction as suggested by Goodhart (1997). Furthermore, by avoiding large

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Kevin J. Brandon

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