Interpreting the Significance of the Lagged Interest Rate in Estimated Monetary Policy Rules

By William B. English, William R. Nelson, Brian P. Sack. 2003

233 citations recorded by the source corpus.

Many researchers have found that the lagged interest rate enters estimated monetary policy rules with overwhelming significance, suggesting that policy adjusts gradually to changes in economic conditions. However, Rudebusch (2002) argues that the lagged interest rate is not a fundamental component of the U.S. policy rule, and that its significance arises from the omission of serially correlated variables from the policy rule. This paper considers the possibility that policy rules may be characterized by both partial adjustment and serially correlated omitted variables. Our findings indicate that even if one allows for serially correlated errors, partial adjustment plays an important role in describing the behavior of the federal funds rate.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/54069bd281eeb7895459edc7d4c3ac6b94c4cf91

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In Economics and Econometrics

Citations in the corpus

The Stress of Having a Single Monetary Policy in Europe (2008, methodology): “Section 4.5 discusses the main findings and the final section offers some concluding comments.”
Has U.S. Monetary Policy Tracked the Efficient Interest Rate (2014, unknown): “” A very large literature has shown that these two arguments, usually coupled with some inertia in the policy rate, provide an accurate description of the observed evolution of the Federal Funds rate in the United States over the last several decades (e.g., Judd and Rudebusch, 1998; Clarida et al., ”
Monetary Policy Inertia: Fact or Fiction? (2006, unknown): “English, Nelson, and Sack (2003) and Gerlach-Kristen (2004) provide two slightly different tests of the inertial and serially correlated shock interpretations that, unlike in Rudebusch (2002a), allow for both partial adjustment and serially correlated shocks to be jointly present.”
Measuring Inflation Persistence: A Structural Time Series Approach (2005, unknown): “The lagged interest rate it−1 introduces a degree of nominal interest rate smoothing or policy inertia (Amato and Laubach, 1999; English et al., 2003; Erceg and Levin, 2003).”
Taylor Rules for the ECB Using Expectations Data (2008, methodology): “Our results suggest that the nested model of English et al. (2003), shown in the last column of Table 1, is preferable to the other models, independent of whether we use ex-post or expectations data. Two econometric findings support this claim. First, the nested model produces lower values of the Ak”
Why are Target Interest Rate Changes so Persistent (2012, methodology): “English et al. (2003) find that both serially correlated shocks and interest rate smoothing are important, while Gerlach-Kristen (2004) similarly finds a role for both mechanisms but indicates that interest smoothing appears to be less important than suggested by the”