Monetary Policy Inertia: Fact or Fiction?” Paper prepared for “Inflation Targeting: Implementation, Communication and Effectiveness,” a workshop at Sveriges Riksbank

This paper examines interest rate inertia in empirical and optimal monetary pol-icy rules. Estimated policy rules are often interpreted as showing extremely slow policy partial adjustment by central banks. Alternatively, the illusion of such inertia may reflect spuriously omitted persistent influences on policy. Simple policy rule regressions and monetary theory do not appear able to provide a compelling case for or against real-world inertia. However, the yield curve is very informative about expectations of future short rates and the monetary policy rule, and a variety of term structure evidence indicates that the amount of actual policy inertia is very low. ∗For helpful comments, I thank many colleagues throughout the Federal Reserve System, especially Bill English. Also, Golnaz Motiey and Vuong Nguyen provided excellent research assistance. The views expressed in this paper are my own and not necessarily those of the Federal Reserve. Homepage: www.frbsf.org/economists/grudebusch