An ordered probit analysis of monetary policy inertia

The two leading explanations of the observed persistence in policy interest rate changes are monetary policy inertia and omitted serially correlated shocks. This paper addresses the persistence debate from the perspective of how to properly model policy rates. An ordered probit model is used to acco...

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Bibliographic Details
Published in:The B.E. journal of macroeconomics 2015-01, Vol.15 (2), p.705-726
Main Author: Bayar, Omer
Format: Article
Language:English
Subjects:
C25
Correlation analysis
E52
E58
Economic models
federal funds rate
Interest rates
Monetary policy
monetary policy inertia
Monetary theory
ordered probit model
Regression analysis
Studies
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Summary:The two leading explanations of the observed persistence in policy interest rate changes are monetary policy inertia and omitted serially correlated shocks. This paper addresses the persistence debate from the perspective of how to properly model policy rates. An ordered probit model is used to account for the discrete nature of interest rate adjustment, an aspect of policy absent in standard models. Ordered probit results show that the impact of inertia on interest rate setting is considerably smaller than indicated by standard models.
ISSN:2194-6116
1935-1690
DOI:10.1515/bejm-2014-0158