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Monetary Policy Inertia: More a Fiction than a fact?

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  • Favero, Carlo A.
  • Consolo, Agostino
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.

Suggested Citation

  • Favero, Carlo A. & Consolo, Agostino, 2009. "Monetary Policy Inertia: More a Fiction than a fact?," CEPR Discussion Papers 7341, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7341
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    More about this item

    Keywords

    Monetary policy rulkes; Weak identification;

    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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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