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Monetary Policy Inertia: More a Fiction than a fact?

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Author Info
Consolo, Agostino
Favero, Carlo A

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Abstract

Empirical estimates of monetary policy reaction functions feature a very high estimated degree of monetary policy inertia. This evidence is very hard to reconcile with the alternative evidence of low predictability of monetary policy rates. In this paper we examine the potential relevance of the problem of weak instruments to correctly identify the degree of monetary policy inertia in forward looking monetary policy reaction function of the type originally proposed by Taylor (1993). After appropriately diagnosing and taking care of the weak instruments problem, we find an estimated degree of policy inertia which is significantly lower than the common value in the empirical literature on monetary policy rules.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7341.

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Date of creation: Jun 2009
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Handle: RePEc:cpr:ceprdp:7341

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Related research
Keywords: Monetary Policy Rulkes; Weak Identification;

Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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