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The Role of Policy Rule Misspecification in Monetary Policy Inertia Debate

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  • Jiri Podpiera

Abstract

Operational monetary policy rules are characterized by a parsimonious specification and are therefore prone to specification error when estimated on real data. I devise a policy rule estimation procedure, which is robust to marginal misspecification, and study the effects of specification error in least squares. I find the robust evidence of upward bias in policy inertia in least squares applied to most commonly used Taylor type rule. In effect, least squares learning of a central bank can lead to increasing monetary policy inertia over time.

Suggested Citation

  • Jiri Podpiera, 2006. "The Role of Policy Rule Misspecification in Monetary Policy Inertia Debate," CERGE-EI Working Papers wp315, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp315
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    References listed on IDEAS

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    1. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
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    Cited by:

    1. Horváth, Roman, 2009. "The time-varying policy neutral rate in real-time: A predictor for future inflation?," Economic Modelling, Elsevier, vol. 26(1), pages 71-81, January.

    More about this item

    Keywords

    Monetary policy inertia; policy rule.;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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