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Household's Preferences and Monetary Policy Inertia

By A. Flamini and A. Fracasso

Abstract

The estimation of monetary policy rules suggests that the interest rates set by central banks move with a certain inertia. Although a number of hypotheses have been suggested to explain this phenomenon, its ultimate origin is unclear, thus delineating this issue as a modern "puzzle" in monetary economics. We show that household's preferences can play an important role in determining optimal interest rate inertia. Importantly, this can occur even when the central bank has egligible preferences for smoothing the interest rate.\u

Publisher: Department of Economics, University of Sheffield
Year: 2009
OAI identifier: oai:eprints.whiterose.ac.uk:9989

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