Policy Irreversibility and Interest Rate Smoothing

Monetary Policy Committees and Interest Rate Smoothing

We extend the New Keynesian Monetary Policy literature relaxing the assumption that the decisions are taken by a single policymaker, considering instead that monetary policy decisions are taken collectively in a committee. We introduce a Monetary Policy Committee (MPC), whose members have different preferences between output and inflation variability and have to vote on the level of the interes...

Persistent Habits, Optimal Monetary Policy Inertia and Interest Rate Smoothing

Dynamic stochastic general equilibrium models featuring imperfect competition and nominal rigidities have become central for the analysis of the monetary transmission mechanism and for understanding the conduct of monetary policy. However, it is agreed that the benchmark model fails to generate the persistence of output and in‡ation that is observed in the data. Moreover, it cannot provide a th...

Global Knowledge, Local Solutions: Interest Rate and Monetary Policy

Backward - Looking Interest - Rate Rules , Interest Rate Smoothing , and Macroeconomic Instability ∗

The existing literature on the stabilizing properties of interest-rate feedback rules has stressed the perils of linking interest rates to forecasts of future inflation. Such rules have been found to give rise to aggregate fluctuations due to self-fulfilling expectations. In response to this concern, a growing literature has focused on the stabilizing properties of interest-rate rules whereby t...

Does Monetary Policy Keep Up with the Joneses? Optimal Interest-Rate Smoothing with Consumption Externalities

Changes in monetary policy are typically implemented gradually, an empirical observation known as interest-rate smoothing. We propose the explanation that timenon-separable preferences may render interest-rate smoothing optimal. We find that when consumers have “catching-up-with-the-Joneses” preferences, optimal monetary policy reacts gradually to shocks to prevent inefficiently fast adjustment...