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Monetary policy inertia: fact or fiction?

  • Glenn D. Rudebusch

Estimated monetary policy rules often appear to indicate a sluggish partial adjustment of the policy interest rate by the central bank. In fact, such evidence does not appear to be persuasive, since the illusion of monetary policy inertia may reflect spuriously omitted persistent influences on the setting of policy. Similarly, theoretical arguments do not provide a compelling case for real-world policy inertia. However, empirical evidence on the policy rule obtained by examining expectations of future monetary policy embedded in the term structure of interest rates is very informative and indicates that the actual amount of policy inertia is quite low.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2005-19.

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Date of creation: 2005
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Handle: RePEc:fip:fedfwp:2005-19
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