IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v25y2008i5p1003-1010.html
   My bibliography  Save this article

The role of ad hoc factors in policy rate settings

Author

Listed:
  • Podpiera, Jirí

Abstract

Policymakers do not always follow a simple rule for setting policy interest rates for various reasons. Thus their behavior can be represented by a standard Taylor type policy rule amended with an additional variable representing an ad hoc factor. Consequently, ignoring the presence of the ad hoc factor causes bias in conventional policy rule estimators. I contrast the unbiased estimates of a procedure that accounts for the ad hoc factors and the bias of least squares on a unique data set of an unconditional inflation targeting episode.

Suggested Citation

  • Podpiera, Jirí, 2008. "The role of ad hoc factors in policy rate settings," Economic Modelling, Elsevier, vol. 25(5), pages 1003-1010, September.
    • Handle: RePEc:eee:ecmode:v:25:y:2008:i:5:p:1003-1010
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264-9993(08)00014-X
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January.
    2. Kevin J. Lansing, 2002. "Real-time estimation of trend output and the illusion of interest rate smoothing," Economic Review, Federal Reserve Bank of San Francisco, pages 17-34.
    3. Choi, Woon Gyu, 1999. "Estimating the Discount Rate Policy Reaction Function of the Monetary Authority," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(4), pages 379-401, July-Aug..
    4. Feinman, Joshua N, 1993. "Estimating the Open Market Desk's Daily Reaction Function," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 231-247, May.
    5. Alex Cukierman, 1989. "Why does the Fed smooth interest rates?," Proceedings, Federal Reserve Bank of St. Louis, pages 111-157.
    6. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
    7. Söderlind, Paul & Söderström, Ulf & Vredin, Anders, 2005. "Dynamic Taylor Rules And The Predictability Of Interest Rates," Macroeconomic Dynamics, Cambridge University Press, vol. 9(3), pages 412-428, June.
    8. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1161-1187, September.
    9. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
    10. Glenn D. Rudebusch, 2006. "Monetary Policy Inertia: Fact or Fiction?," International Journal of Central Banking, International Journal of Central Banking, vol. 2(4), December.
    11. Hakkio, Craig S. & Pearce, Douglas K., 1992. "Discount rate policy under alternative operating procedures: An empirical investigation," International Review of Economics & Finance, Elsevier, vol. 1(1), pages 55-72.
    12. Podpiera, Jiří, 2007. "Policy rate decisions and unbiased parameter estimation in typical monetary policy rules," Working Paper Series 771, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:cnb:ocpubc:09 is not listed on IDEAS
    2. Baxa, Jaromír & Horváth, Roman & Vašíček, Bořek, 2014. "How Does Monetary Policy Change? Evidence On Inflation-Targeting Countries," Macroeconomic Dynamics, Cambridge University Press, vol. 18(3), pages 593-630, April.
    3. repec:cnb:ocpubv:rb07/1 is not listed on IDEAS
    4. repec:cnb:ocpubv:rb07/2 is not listed on IDEAS
    5. Roman Horvath, 2008. "Asymmetric Monetary Policy in the Czech Republic?," Occasional Publications - Chapters in Edited Volumes, in: Katerina Smidkova (ed.), Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007, chapter 9, pages 117-130, Czech National Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jiri Podpiera, 2008. "Policy Rate Decisions and Unbiased Parameter Estimation in Conventionally Estimated Monetary Policy Rules," Working Papers 2008/2, Czech National Bank.
    2. Jiri Podpiera, 2006. "The Role of Policy Rule Misspecification in Monetary Policy Inertia Debate," CERGE-EI Working Papers wp315, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    3. Glenn D. Rudebusch, 2006. "Monetary Policy Inertia: Fact or Fiction?," International Journal of Central Banking, International Journal of Central Banking, vol. 2(4), December.
    4. John Driffill & Zeno Rotondi, 2007. "Inertia in Taylor Rules," WEF Working Papers 0032, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
    5. Richard Dennis, 2006. "The policy preferences of the US Federal Reserve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 55-77.
    6. Thornton, Daniel L., 2005. "Tests of the expectations hypothesis: Resolving the anomalies when the short-term rate is the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2541-2556, October.
    7. 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.
    8. Bayar, Omer, 2018. "Weak instruments and estimated monetary policy rules," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 308-317.
    9. Pär Österholm, 2005. "The Taylor Rule: A Spurious Regression?," Bulletin of Economic Research, Wiley Blackwell, vol. 57(3), pages 217-247, July.
    10. Paulo R. Mota & Abel L. C. Fernandes, 2019. "The Dynamic Adjustment Of Central Banks’ Target Interest Rate: The Case Of The Ecb," FEP Working Papers 613, Universidade do Porto, Faculdade de Economia do Porto.
    11. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2001. "Banks' reserve management, transaction costs, and the timing of Federal Reserve intervention," Journal of Banking & Finance, Elsevier, vol. 25(7), pages 1287-1317, July.
    12. Christian Aubin & Ibrahima Diouf & Dominique Pepin, 2010. "Inertie De La Politique Monétaire Dans La Zone Euro : Le Rôle De L'Hétérogénéité," Post-Print hal-00960030, HAL.
    13. Gerberding, Christina & Seitz, Franz & Worms, Andreas, 2007. "Money-based interest rate rules: lessons from German data," Discussion Paper Series 1: Economic Studies 2007,06, Deutsche Bundesbank.
    14. Hurn Stan & Johnson Nicholas & Silvennoinen Annastiina & Teräsvirta Timo, 2022. "Transition from the Taylor rule to the zero lower bound," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 26(5), pages 635-647, December.
    15. Daniel L. Thornton, 2018. "Greenspan's Conundrum and the Fed's Ability to Affect Long‐Term Yields," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(2-3), pages 513-543, March.
    16. Jaroslav Brada & Karel Brůna, 2004. "Analýza citlivosti referenčních úrokových sazeb PRIBOR na změny repo sazby České národní banky [An analysis of PRIBOR interest rates sensitivity to changes in Czech national bank repo rate]," Politická ekonomie, Prague University of Economics and Business, vol. 2004(5), pages 601-621.
    17. Cinzia Alcidi , Alessandro Flamini, Andrea Fracasso, 2005. ""Taylored rules". Does one fit (or hide) all?," IHEID Working Papers 04-2005, Economics Section, The Graduate Institute of International Studies, revised Apr 2006.
    18. Woon Gyu Choi & Yi Wen, 2010. "Dissecting Taylor Rules in a Structural VAR," IMF Working Papers 2010/020, International Monetary Fund.
    19. Gnabo, Jean-Yves & Moccero, Diego Nicolas, 2015. "Risk management, nonlinearity and aggressiveness in monetary policy: The case of the US Fed," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 281-294.
    20. Sarno, Lucio & Thornton, Daniel L., 2003. "The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1079-1110, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:25:y:2008:i:5:p:1003-1010. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.