Monetary Policy Rules in Emerging Countries: Is There an Augmented Nonlinear Taylor Rule?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper examines the Taylor rule in five emerging economies, namely Indonesia, Israel, South Korea, Thailand, and Turkey. In particular, it investigates whether monetary policy in these countries can be more accurately described by (i) an augmented rule including the exchange rate, as well as (ii) a nonlinear threshold specification (estimated using GMM), instead of a baseline linear rule. The results suggest that the reaction of monetary authorities to deviations from target of either the inflation or the output gap varies in terms of magnitude and/or statistical significance across the high and low inflation regimes in all countries. In particular, the exchange rate has an impact in the former but not in the latter regime. Overall, an augmented nonlinear Taylor rule appears to capture more accurately the behaviour of monetary authorities in these countries.

Is the interest rate setting behaviour of the Bank of Ghana constrained by high debt levels?

“…Further dimensions to the Taylor rule such as the smoothing of interest (Blinder & Reis, 2005) and the fact that policymakers react to future macroeconomic developments (Woodford, 2001) enriched the policy rule discourse. The nonlinear policy rule paradigm (Ahmad, 2016;Caporale, Helmi, Çatık, Ali, & Akdeniz, 2018;Liu, Xu, Zhao, & Song, 2018) raised serious doubts about the linear Taylor rule and ushered in a new strand of the policy rule literature. However, what is fundamentally missing in all of these is the constraint that high debt levels pose to monetary policymakers in the very response that these previous studies sought to capture.…”

“…The STAMP undertakes the decomposition with the aid of the maximum likelihood estimation technique. Earlier studies such as Liu et al (2018), Caporale et al (2018) and Ma (2016) had employed the Hodrick-Prescott (HP) filter developed by Hodrick and Prescott (1997) to estimate the trend. The HP filter, however, exhibits some limitations.…”

Global Factors Driving Inflation and Monetary Policy: A Global VAR Assessment

“…Evidence can be found that the euro/dollar exchange rate follows its short-term interest differential. For the EMEs, according to Caporale et al (2018), such an exchange rate augmented Taylor rule is requested to describe their interest rate setting. As our sample includes countries with fairly stable exchange rates and others with more volatile rates, we expect that the coefficient of the exchange rate in the monetary policy equation will be heterogeneous across countries.…”

Nonlinear Taylor rules: evidence from a large dataset

“…Bec, Salem, and Collard (2002), Cukierman and Gerlach (2003), Nobay and Peel (2003), Ruge-Murcia (2004), Martin and Milas 2004, Kim, Osborn, and Sensier (2005), Taylor and Davradakis (2006), and Surico (2007aSurico ( , 2007b, Petersen (2007), Cukierman and Muscatelli (2008), Hayat and Mishra (2010), and Castro (2011) also argue that the Taylor rule could be better specified as a non-linear relationship if central banks have asymmetric responses to positive and negative deviations in the inflation and output gap. Caporale et al (2016) estimates a Threshold Autoregressive (TAR), exchange rate-augmented Taylor rule specification for five inflation targeting, emerging countries and find substantial evidence for non-linearity in the conduct of monetary policy. In addition, they also find that most of the central banks react to deviations in real exchange rates.…”