Policy rate decisions and unbiased parameter estimation in typical monetary policy rules

Policymakers do not always follow a simple rule for setting policy rates for various reasons and thus their choices are co-driven by a decision to follow a rule or not. Consequently, some observations are censored and cause bias in conventional estimators of typical Taylor rules. To account for the censored and discrete process of policy rate setting, I devise a new method for monetary policy rule estimation and demonstrate its ability to outperform the existing conventional estimators using two examples.