Abstract
The federal funds rate is featured by frequent, small changes in the same direction and infrequent reversals. How to replicate the observed smooth behavior of the federal funds rate with a small scale macroeconomic model? This paper compares the descriptive performance of an empirical fully backward looking model with that of an empirical new-Keynesian hybrid framework. It turns out that the Feds monetary policy conduct can be very well described with a framework allowing for the presence of a small but positive fraction of forward looking agents in the IS curve. This element remarkably reduces the large interest rate smoothing weight otherwise needed to track the observed macroeconomic series.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
