Journal Article

Optimal Interest-Rate Smoothing

Michael Woodford

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 70, issue 4, pages 861-886
Published in print October 2003 | ISSN: 0034-6527
Published online October 2003 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00270
Optimal Interest-Rate Smoothing

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  • Monetary Policy, Central Banking, and the Supply of Money and Credit
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This paper considers the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions. It shows, in the context of a simple model of optimizing private-sector behaviour, that assignment of an interest-rate smoothing objective to the central bank may be desirable, even when reduction of the magnitude of interest-rate changes is not a social objective in itself. This is because a response of policy to “irrelevant” lagged variables may be desirable owing to the way it steers private-sector expectations of future policy.

Keywords: E43; E52

Journal Article.  13870 words.  Illustrated.

Subjects: Monetary Policy, Central Banking, and the Supply of Money and Credit ; Money and Interest Rates

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