Abstract
We propose and estimate several discrete choice models of monetary policy decision-making that feature time-varying inertia. The models permit us to account for three stylized facts characterizing monetary policymaking in the United States: (1) target interest rates are gradually adjusted in small discrete movements, (2) there are some long stretches of time in which rates are repeatedly moved, and (3) there are other long stretches in which the policy rate does not change. The proposed models perform well in predicting in-sample policy choices of the Federal Reserve and can explain the presence of policy inertia without including multiple lagged dependent variables in a monetary policy reaction function.
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