Taking two steps at a time: On the optimal pattern of policy interest rates

Most central banks change interest rates in steps of 25, 50 or 75 basis points at scheduled dates. This paper models the optimal step size and frequency of policy decisions. In contrast to the existing literature we argue that a fixed step size facilitates policy decisions, which we assume are taken by a monetary policy committee. The step pattern depends on the variability of the optimal interest rate, policymakers' uncertainty and institutional aspects of the committee. The model extends the literature by predicting that interest rates are occasionally adjusted by two or more steps.