Monetary Policy Regime Shifts: New Evidence From Time‐varying Interest Rate Rules

Abstract

"We estimate forward-looking interest rate rules for five large Organization for Economic Cooperation and Development economies, allowing for time variation in the responses to macroeconomic conditions and in the variance of the policy rate. Conventional constant parameter reaction functions likely blur the impact of (1) model uncertainty, (2) conflicting objectives, (3) shifting preferences, and (4) nonlinearities of policymakers' choices. We find that monetary policies followed by the United States, the United Kingdom, Germany, France, and Italy are best summarized by feedback rules that allow for time variation in their parameters. Estimates point to sizeable differences in the actual conduct of monetary policies even in countries now belonging to the European Monetary Union. Moreover, our time-varying parameter specification outperforms the conventional Taylor rule and generalized method of moment-based estimates of reaction functions in tracking the actual Fed funds rate." ("JEL" E52, E58, E60) Copyright (c) 2009 Western Economic Association International.

Changes in inflation dynamics under inflation targeting? Evidence from Central European countries

“…The decrease of inflation persistence has been attributed to a more aggressive monetary policy stance in the US (Davig and Doh, 2008) and to the implementation of credible monetary policy regimes such as inflation targeting elsewhere (Benati, 2008). The linkage between changes in inflation dynamics and monetary policy is further corroborated by evidence about structural changes in monetary policy itself (Baxa et al, 2010;Boivin, 2006;Kim and Nelson, 2006;Koop et al, 2009;Sims and Zha, 2006;Trecroci and Vassalli, 2010).…”

The Monetary Transmission Mechanism in Canada: A Time-Varying Vector Autoregression with Stochastic Volatility

“…Besides the time-varying coefficient property, their study also considered the uncertainty included in the forecasts of future inflation and output gap. Wesche (2003) performed a time-varying coefficient Taylor rule analysis for the countries considered in Trecroci and Vassalli (2006). He reached a similar conclusion using a Markov-switching model with independent switching processes for the time-varying parameters of the Taylor rule and variances of disturbances.…”

“…In the time-varying coefficient framework, many studies have focused just on the monetary-policy reaction function or the Taylor rule. Trecroci and Vassalli (2006), for example, estimated forward-looking Taylor rules for the UK, Germany, France, Italy and the U.S., using the Kalman filter. They demonstrated that the countries analyzed had different interest rate rules and that time-varying Taylor rules are preferred when compared to fixed parameter rules for capturing the variations in the policy rates.…”

Nonlinear Taylor rules: evidence from a large dataset

“…Orphanides and Williams (2005) and Sims and Zha (2006) also document time-variation in the parameters of Taylor rules using a VAR model. Elkhoury (2006), Kuzin (2006), and Trecroci and Vassalli (2006) shows that TVP of Taylor rules outperform Taylor rules with fixed parameters for a substantial number of developed and non-developed countries. Jalil (2004), Boivin and Giannoni (2006), and Kim and Nelson (2006) use the Kalman Filter to illustrate that parameters of the Taylor rule change gradually over time.…”