Interest Rate Smoothing and "Calvo-Type" Interest Rate Rules: A Comment on Levine, McAdam, and Pearlman (2007)

In a recent paper, Levine, McAdam, and Pearlman (2007) propose a new type of interest rate rule, which they denote a “Calvo-type” rule. The Calvo-type interest rate responds to the discounted sum of current and future rates of inflation. We show that a Calvo-type rule can be derived from a very different assumption than the one used by Levine, McAdam, and Pearlman (2007), namely a preference for interest rate smoothing. In addition to giving an alternative rationale for the Calvo-type rule, we provide additional empirical support for the specification.