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Inertia in Taylor Rules

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  • Driffill, John
  • Rotondi, Zeno

Abstract

The inertia found in econometric estimates of interest rate rules is a continuing puzzle. Many reasons for it have been offered, though unsatisfactorily, and the issue remains open. In the empirical literature on interest rate rules, inertia in setting interest rates is typically modelled by specifying a Taylor rule with the lagged policy rate on the right hand side. We argue that inertia in the policy rule may simply reflect the inertia in the economy itself, since optimal rules typically inherit the inertia present in the model of the economy. Our hypothesis receives some support from US data. Hence we agree with Rudebusch (2002) that monetary inertia is, at least partly, an illusion, but for different reasons.

Suggested Citation

  • Driffill, John & Rotondi, Zeno, 2007. "Inertia in Taylor Rules," CEPR Discussion Papers 6570, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:6570
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    Cited by:

    1. Masciandaro, Donato, 2022. "Independence, conservatism, and beyond: Monetary policy, central bank governance and central banker preferences (1981–2021)," Journal of International Money and Finance, Elsevier, vol. 122(C).
    2. Flamini, Alessandro & Fracasso, Andrea, 2011. "Household's preferences and monetary policy inertia," Economics Letters, Elsevier, vol. 111(1), pages 64-67, April.
    3. Yu Hsing, 2008. "Test of the Response of the Overnight Rate to the Real Exchange Rate: The Case of Korea, Hong Kong, and Singapore," Global Economic Review, Taylor & Francis Journals, vol. 37(3), pages 333-339.
    4. Dilian Vassilev, 2021. "A Model of Natural Interest Rate: The Case of Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 7, pages 46-72.
    5. Donato Masciandaro, 2021. "Central Bank Governance in Monetary Policy Economics (1981-2020)," BAFFI CAREFIN Working Papers 21153, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    6. Keshab Bhattarai & Matthew Carter, 2018. "An Empirical Analysis of the Taylor Rule and its Application to Monetary Policy: A Case for the United Kingdom and Euro Area," Asian Journal of Economics and Empirical Research, Asian Online Journal Publishing Group, vol. 5(2), pages 173-182.

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    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

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