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Monetary Policy Inertia or Persistent Shocks?

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  • Carrillo, J.
  • Fève, P.
  • Matheron, J.

Abstract

In this paper, we propose a simple econometric framework to disentangle the respective roles of monetary policy inertia and persistent shocks in interest rate rules. The procedure exploits the cross-equation restrictions provided by a DSGE model which is confronted to a monetary SVAR. We show that, provided enough informative variables are included in the formal test, the data favour a monetary policy representation with low inertia and highly serially correlated monetary shocks. To the contrary, when the procedure is based solely on the dynamic behavior of the nominal interest rate, no clear-cut conclusion can be reached as to the correct representation of monetary policy.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 150.

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Length: 63 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bfr:banfra:150

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Keywords: Taylor rule ; Monetary policy identification ; Policy Inertia.;

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