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    Inertia in Taylor Rules

    Driffill, John and Rotondi, Z. (2007) Inertia in Taylor Rules. Working Paper. Birkbeck, University of London, London, UK.

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    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.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: BWPEF 0720
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 26 Mar 2019 14:48
    Last Modified: 27 Jul 2019 07:49
    URI: http://eprints.bbk.ac.uk/id/eprint/26892

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