The learning cost of interest rate reversals |
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Authors: | Martin Ellison |
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Affiliation: | a University of Warwick, Coventry, CV4 7AL, UK b CEPR, London EC1V 7RR, UK |
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Abstract: | Many central banks in many time periods have sought to avoid interest rate reversals, but at present there is no good explanation of this phenomenon. Our analysis identifies a new learning cost associated with reversing the interest rate. In a standard monetary model with forward-looking expectations, data uncertainty and parameter uncertainty, a policy that frequently reverses the interest rate makes learning the key parameters of the model more difficult. Optimal monetary policy internalises this learning cost and therefore has a lower number of interest rate reversals. |
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Keywords: | D83 E52 E58 |
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