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An ordered probit analysis of monetary policy inertia

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  • Bayar Omer

    (Schroeder School of Business, University of Evansville, 1800 Lincoln Avenue Evansville, IN 47722 USA)

Abstract

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.

Suggested Citation

  • Bayar Omer, 2015. "An ordered probit analysis of monetary policy inertia," The B.E. Journal of Macroeconomics, De Gruyter, vol. 15(2), pages 705-726, July.
    • Handle: RePEc:bpj:bejmac:v:15:y:2015:i:2:p:705-726:n:11
    DOI: 10.1515/bejm-2014-0158
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    References listed on IDEAS

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