Seminars 2009 — Abstracts

Thursday, April 9

Speaker: Chris Spencer, Loughborough

Title: To Change or not to Change? Interest-Rate Inertia, Unobserved Heterogeneity, and Inflated Outcomes

Abstract: Even in the face of a continuously changing economic environment, interest rates remain unadjusted for long periods. When rates are moved, the norm is for a series of small unidirectional discrete basis-point changes. These stylised facts extend to votes on the policy rate cast by Bank of England Monetary Policy Committee members. To explain voting behavior, we propose a two-equation system combining a dichotomous inertia equation capturing the propensity to change the interest rate, and a policy-rule equation. We account for unobserved heterogeneity in both equations and allow for time-dependent voting decisions.