Monetary Policy Inertia: More a Fiction than a fact? Consolo, Agostino; Favero, Carlo A

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Consolo, Agostino ; Favero, Carlo A
Appears In
Journal of Monetary Economics
Monetary policy.; Government expenditures; Economics
Academic; Trade
To link to full-text access for this article, visit this link: Byline: Agostino Consolo, Carlo A. Favero Abstract: Empirical estimates of monetary policy reaction functions feature a very high estimated degree of monetary policy inertia. This evidence is very hard of 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. Discretion versus policy rules in practice. Canergie-Rochester Conference Series on Public Policy, 39, 195-214]. 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. Author Affiliation: IGIER-Bocconi University, IGIER, Department of Finance Bocconi University, and CEPR, Italy Article History: Received 14 March 2008; Revised 18 June 2009; Accepted 23 June 2009
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