Serially correlated monetary shocks dominate interest rate rules, study finds.
The article examines how monetary policy inertia and persistent shocks affect interest rate rules. By using a DSGE model and monetary SVAR, the researchers found that including informative variables in the test favored a representation with modest policy inertia and highly correlated monetary shocks. However, when only looking at the nominal interest rate behavior, it was unclear which representation of monetary policy was correct.