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Monetary Policy Inertia or Persistent Shocks: A DSGE Analysis

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  • Carrillo, Julio
  • Fève, Patrick
  • Matheron, Julien

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. We exploit the restrictions of a DSGE model that is confronted with a monetary SVAR. We show that, provided enough informative variables are included in the formal test, the data favor a monetary policy representation with modest 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 about the correct representation of monetary policy.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 431.

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Date of creation: Feb 2007
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Publication status: Published in International Journal of Central Banking, juin 2007, p.�1-38.
Handle: RePEc:ide:wpaper:5940

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