The Optimal Design of Interest Rate Target Changes

Abstract

This paper derives the optimal size and timing of interest rate target changes. Despite the simplicity of the optimal rule, we are able to replicate a number of puzzling features of interest rate targeting observe in practice, as well as explain some dynamic properties of market interest rates. Extensions to deal with monetary policy cycles, anticipated and unanticipated target changes, and the effect of FOMC meeting dates are discussed.

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