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Weak instruments and estimated monetary policy rules

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  • Bayar, Omer

Abstract

Empirical monetary policy rules provide benchmarks for policy evaluation by determining how interest rates respond to a small set of macro variables. These rules are based on forward-looking models that require instruments for consistent estimation. The use of standard, albeit weak, instruments leads to identification problems in forward-looking rules, preventing reliable policy inference. There are methods to improve instrument strength. When policy rules are estimated with stronger instruments, results are more precise and in closer alignment with theory than standard estimates.

Suggested Citation

  • Bayar, Omer, 2018. "Weak instruments and estimated monetary policy rules," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 308-317.
    • Handle: RePEc:eee:jmacro:v:58:y:2018:i:c:p:308-317
    DOI: 10.1016/j.jmacro.2018.10.004
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    More about this item

    Keywords

    Forward-looking policy rule; Weak instruments; Robust estimation; Instrument selection;
    All these keywords.

    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
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation

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