Weak instruments and estimated monetary policy rules

Omer Bayar

Journal of Macroeconomics, 2018, vol. 58, issue C, 308-317

Abstract: Empirical monetary policy rules provide benchmarks for policy evaluation by determining how interest rates respond to a small set of macro variables. These rules are based on forward-looking models that require instruments for consistent estimation. The use of standard, albeit weak, instruments leads to identification problems in forward-looking rules, preventing reliable policy inference. There are methods to improve instrument strength. When policy rules are estimated with stronger instruments, results are more precise and in closer alignment with theory than standard estimates.

Keywords: Forward-looking policy rule; Weak instruments; Robust estimation; Instrument selection (search for similar items in EconPapers)
JEL-codes: C26 E52 E58 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:58:y:2018:i:c:p:308-317

DOI: 10.1016/j.jmacro.2018.10.004

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