Conference Paper

Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability

Abstract: The existing literature on the stabilizing properties of interest-rate feedback rules has stressed the perils of linking interest rates to forecasts of future inflation. Such rules have been found to give rise to aggregate fluctuations due to self-fulfilling expectations. In response to this concern, a growing literature has focused on the stabilizing properties of interest-rate rules whereby the central bank responds to a measure of past inflation. The consensus view that has emerged is that backward-looking rules contribute to protecting the economy from embarking on expectations-driven fluctuations. A common characteristic of the existing studies that arrive at this conclusion is their focus on local analysis. The contribution of this paper is to conduct a more global analysis.

Keywords: Economic stabilization; Interest rates; Monetary policy;

Status: Published in Journal of money, credit, and banking, volume 35, no. 6, pt. 2, December 2003

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Proceedings

Publication Date: 2003

Pages: 1379-1423