Monetary Policy Inertia: More a Fiction than a fact?

Agostino Consolo and Carlo Favero ()

No 7341, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Empirical estimates of monetary policy reaction functions feature a very high estimated degree of monetary policy inertia. This evidence is very hard to reconcile with the alternative evidence of low predictability of monetary policy rates. In this paper we examine the potential relevance of the problem of weak instruments to correctly identify the degree of monetary policy inertia in forward looking monetary policy reaction function of the type originally proposed by Taylor (1993). After appropriately diagnosing and taking care of the weak instruments problem, we find an estimated degree of policy inertia which is significantly lower than the common value in the empirical literature on monetary policy rules.

Keywords: Monetary Policy Rulkes; Weak Identification (search for similar items in EconPapers)
JEL-codes: E52 E58 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2009-06

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