“Taking two steps at a time: On the optimal step pattern of policy rates” by Petra Gerlach-Kristen
University of Hong Kong and University of Basel
Most central banks change interest rates in steps of 25, 50 or 75 basis points at pre-scheduled dates. This paper provides a model to determine optimally the step size of interest rate changes and the frequency of policy decisions. In contrast to the existing literature, which assumes that the step pattern is due to the central bank's reluctance to unsettle financial markets, we argue that steps are necessary to focus the policy discussion. The analysis indicates that a step size of 25 basis points appears suboptimally large in many industrialised countries and that more frequent policy meetings might be desirable.