Taylor rule estimation by OLS

•Ordinary Least Squares (OLS) estimates of monetary policy rules are potentially inconsistent, due to endogeneity.•Instrumental Variables (IV) can solve this problem, but validity of potential instruments depends on unobserved features of the economy.•We argue in favor of OLS estimation of monetary policy rules.•We show analytically in the three-equation New Keynesian model that the asymptotic OLS bias is proportional to the fraction of the variance of regressors due to monetary policy shocks, which tends to be small.•Using Monte Carlo simulations, we show this finding also holds in a quantitative model of the U.S. economy. For realistic sample sizes, OLS outperforms IV.•Finally, we estimate a standard Taylor rule on different subsamples of U.S. data and find that OLS and IV estimates are quite similar.