Assessing McCallum and Taylor rules in a cross-section of emerging market economies

Thailand was one of the first emerging Asian economies to collapse following the financial crisis of [1997][1998]. Correspondingly the monetary policy regime of this country has gone through an extreme shift from a rigid to floating exchange rate with the adoption of inflation targeting policy. Therefore, it is interesting to examine the behaviour of monetary policy of Thailand focusing on two different periods: pre-crisis and post-crisis using the threshold estimations method as evidence found on the nonlinearity structure on both sub-periods. Our results indicating, the policy reaction function of Thailand is decided based on economic growth (LGDP) and inflation (LCPI) for pre-and post-crisis respectively. Overall, the policy rule is reacting strongly to inflation gap. While policy rule is also responsive to output gap but was limited only at the post-crisis period. On the other hand, we also detected the policy rule behaving adversely to exchange rate changes aftermath crisis. To conclude, the ultimate goal of Thai monetary policy is to achieve low inflation rate for price stability. Perhaps, output gap is not the major concern since the economy has achieved high stable growth. Although Thailand was implementing inflation targeting aftermath crisis, the results revealing the existence of 'fear of floating' behaviour when the policy rule reacting strongly towards appreciation of exchange rate by declining the policy rate.

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“…In this paper, we seek to estimate the policy rule as in (Mehrotra and Sanchez-Fung, 2009) (Eqs. 1, 2, and3):…”

Section: Methodsmentioning

confidence: 99%

Unveiling the behaviour of policy reaction function in Thailand: A pre and post crisis investigation

Manogaran¹,

Sek

2017

Int. j. adv. appl. sci.

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“…We then use deviations from the Hodrick–Prescott‐filtered trend ( λ = 1,600) as the measure of the output gap. Finally, while the exchange rate is not often used in such investigations for wealthy countries, Mehrotra and Sanchez‐Fung (2011), and Moura and de Carvalho (2010) employ it in their study of emerging markets. This makes sense, as emerging market economies are subject to potentially large, external shocks, and hence the exchange rate may be an important variable for monetary policy.…”

Section: Methodsmentioning

confidence: 99%

“…Modern investigations of monetary policy typically involve estimating Taylor rules (Moura and de Carvalho 2010; Mehrotra and Sanchez‐Fung 2011; Taguchi and Kato 2011). This involves regressing the short‐term interest rate on the inflation rate and the output gap (defined as the deviation of output from its long‐run trend level).…”

Section: Literature Reviewmentioning

confidence: 99%

“…Mehrotra and Sanchez‐Fung (2011) examined central bank behaviour in terms of Taylor and McCallum Rules for 20 emerging market countries in Asia, Latin America, and Africa. Moura and de Carvalho (2010) investigated central bank behaviour in a sample of Latin American countries through estimation of the Taylor (2003) rule.…”

Section: Introductionmentioning

confidence: 99%

“…Mehrotra and Sanchez‐Fung (2011) find that policy is endogenous in that in most nations, central banks respond to at least one regressor (inflation, the output gap, or the exchange rate). The authors confined their analysis to linear models, however.…”

Section: Introductionmentioning

confidence: 99%

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Is monetary policy non‐linear in Indonesia, Korea, Malaysia, and Thailand? A quantile regression analysis

Miles

Schreyer

2012

Asian-Pac Economic Lit

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There is a growing literature on the linearity or otherwise of monetary policy in industrialised countries. The investigations have revealed that the reactions of central banks to economic variables depend on the level of the variables, confirming the non-linearity of monetary policy in these countries. However, research into whether monetary policy is non-linear in emerging markets has been hampered by the lack of data, as a stable, 'modern' monetary regime has existed in emerging markets for only a relatively short time.Employing quantile regression, which is not as constrained as other regression methods by the shortness of time series, we investigate the non-linearity of monetary policy in four emerging Asian nations: Indonesia, Korea, Malaysia, and Thailand. Our results indicate that monetary policy in all four is non-linear. All display a 'hump-shaped' response to inflation across the quantiles-policy becomes tighter, going from lower to higher quantiles, reaches a peak, and then becomes looser. These results are similar to those found previously in Japan, and likely arise from a desire to limit exchange rate appreciation, as all four countries depend heavily on exports.

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Regime-switching monetary and fiscal policy rules and their interaction: an Indian case study

Arora

2017

Empir Econ

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Assessing McCallum and Taylor rules in a cross-section of emerging market economies

Cited by 22 publications

References 46 publications

Unveiling the behaviour of policy reaction function in Thailand: A pre and post crisis investigation

Unveiling the behaviour of policy reaction function in Thailand: A pre and post crisis investigation

Is monetary policy non‐linear in Indonesia, Korea, Malaysia, and Thailand? A quantile regression analysis

Regime-switching monetary and fiscal policy rules and their interaction: an Indian case study

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