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Inertia in Taylor Rules

Author

Listed:
  • John Driffill

    (Birkbeck, University of London)

  • Zeno Rotondi

    (University of Ferrara)

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 modeled 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

  • John Driffill & Zeno Rotondi, 2007. "Inertia in Taylor Rules," WEF Working Papers 0032, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
    • Handle: RePEc:wef:wpaper:0032
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    References listed on IDEAS

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    3. Flamini, Alessandro & Fracasso, Andrea, 2011. "Household's preferences and monetary policy inertia," Economics Letters, Elsevier, vol. 111(1), pages 64-67, April.
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    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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    More about this item

    Keywords

    Monetary Policy; Interest Rate Rules; Taylor rule; Interest Rate Smoothing; Monetary Policy Inertia; Predictability of Interest Rates; Term Structure; Expectations Hypothesis;
    All these keywords.

    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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