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Monetary Policy Inertia or Persistent Shocks: A DSGE Analysis

  • Julio Carrillo

    (University of Toulouse (GREMAQ))

  • Patrick Fève

    (University of Toulouse (GREMAQ and IDEI))

  • Julien Matheron

    (Banque de France (DGEI-DIR-Service de Recherche en économie et finance))

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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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 3 (2007)
Issue (Month): 2 (June)
Pages: 1-38

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Handle: RePEc:ijc:ijcjou:y:2007:q:2:a:1
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