Shock matters for estimating monetary policy rules

This study proposes a simple methodology to conditionally estimate monetary-policy rule parameters for underlying structural shocks. The results are summarized as follows. First, the Federal Reserve (Fed) chooses different responses to different types of shocks. Second, the long-run response of policy rates to inflation does not exceed 1 for some shocks. This result suggests that the Fed does not meet the Taylor principle for some shocks. (C) 2019 The Author(s). Published by Elsevier B.V