Monetary Policy Inertia: Fact or Fiction?
by Glenn D. Rudebusch
Federal Reserve Bank of San Francisco
Many interpret estimated monetary policy rules as suggesting that central banks
conduct very sluggish partial adjustment of short-term policy interest rates.
In contrast, others argue that this appearance of policy inertia is an illusion
and simply reflects the spurious omission of important persistent influences on
the actual setting of policy. Similarly, the real-world implications of the
theoretical arguments for policy inertia are open to debate. However, empirical
evidence on policy gradualism obtained by examining expectations of future
monetary policy embedded in the term structure of interest rates is definitive
and indicates that the actual amount of policy inertia is quite low.
JEL Codes: E44, E52.
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