The role of ad hoc factors in policy rate settings

Policymakers do not always follow a simple rule for setting policy interest rates for various reasons. Thus their behavior can be represented by a standard Taylor type policy rule amended with an additional variable representing an ad hoc factor. Consequently, ingnoring the presence of the ad hoc factor causes bias in conventional policy rule estimators. I contrast the unbiased estimates of a procedure that accounts for the ad hoc factors and the bias of least squares on a unique data set of an unconditional inflation targeting episode. (C) 2008 Elsevier B.V. All rights reserved.