This paper considers the desirability of the observed tendency of central backs to adjust interest rates only gradually in response to changes in economic conditions.It shows,in the context of a simple model of optimizing private-sector behaviour,that assignment of an interest-rate smoothing objective to the central bank may be desirable,even when reduction of the magnitude of interest-rate changes is not a social objective in itself.This is because a response of policy to "irrelevant"lagged variables may be desirable owing to the way it steers private-sector expectations of future policy.
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