Weak instruments and estimated monetary policy rules

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.