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.
Our models are used to account for the Fed’s failure to adopt promptly an easier policy stance
during the recession of 2001. They are also used to explain delay in tightening the policy stance
during the 2003-2006 period that featured a bubble in house prices and was followed by a
financial crisis in 2008.
This paper is in closed access until 10th April 2021.
Spencer thanks the School of Business
and Economics for financially supporting this research. Harris kindly acknowledges financial support from the
Australia Research Council.