S-WoPEc
 
Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 155:
Reaction Function Estimation when Central Banks Face Adjustment Costs

Kasper Roszbach ()

Abstract: The main instrument of monetary policy in industrialized countries is currently a short-term interest rate. It typically remains unchanged during long spans of time. This paper tries to answer three questions. Why do Central Banks change targeted interest rates so seldom? How should we estimate Central banks' reaction functions? And what are the driving forces behind rate changes? This paper takes the point of view that Central Banks face a fixed cost when adjusting the targeted interest rate and therefore smoothe the targeted interest rate by using a discrete policy rule. In the estimation of the reaction function this discrete nature is taken into account by applying a grouped data model to a Swedish data set. It is found that the reaction function is best represented in terms of changes in growth rates of macro variables and changes in levels of financial variables. Probabilities of the target rate being raised, lowered or kept constant are computed and compared with actual interest rate behavior. The model has a prediction rate of 88% versus 78% for the best naive estimator.

JEL-Codes: C35; E43; E52; E58; (follow links to similar papers)

28 pages, January 1997

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

hastef0155.pdf    PDF-file (309kB) 
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:hastef:0155 This page was generated on 2014-12-14 19:22:52