Search results

The article aims to establish whether the degree of aversion to inflation and the responsiveness to deviations from potential output have changed over time.

This paper assesses time variation in monetary policy rules by applying a time-varying parameter generalised methods of moments (TVP-GMM) framework.

Using monthly data until December 2022 for five inflation targeting countries (the UK, Canada, Australia, New Zealand, Sweden) and five countries with alternative monetary regimes (the US, Japan, Denmark, the Euro Area, Switzerland), we find that monetary policy has become more averse to inflation and more responsive to the output gap in both sets of countries over time. In particular, there has been a clear shift in inflation targeting countries towards a more hawkish stance on inflation since the adoption of this regime and a greater response to both inflation and the output gap in most countries after the global financial crisis, which indicates a stronger reliance on monetary rules to stabilise the economy in recent years. It also appears that inflation targeting countries pay greater attention to the exchange rate pass-through channel when setting interest rates. Finally, monetary surprises do not seem to be an important determinant of the evolution over time of the Taylor rule parameters, which suggests a high degree of monetary policy transparency in the countries under examination.

It provides new evidence on changes over time in monetary policy rules.

This chapter estimates a regime switching Taylor Rule for the European Central Bank (ECB) in order to investigate some potential nonlinearities in the forward-looking policy reaction function within a real-time framework. In order to compare observed and predicted policy behavior, the chapter estimates Actual and Perceived regime switching Taylor Rules for the ECB. The former is based on the refi rate set by the Governing Council while the latter relies on the professional point forecasts of the refi rate performed by a large investment bank before the upcoming policy rate decision. The empirical evidence shows that the Central Bank’s main policy rate has switched between two regimes: in the first one the Taylor Principle is satisfied and the ECB stabilizes the economic outlook, while in the second regime the Central Bank cuts rates more aggressively and puts a higher emphasis on stabilizing real output growth expectations. Second, the results point out that the professional forecasters have broadly well predicted the actual policy regimes. The estimation results are also robust to using consensus forecasts of inflation and real output growth. The empirical evidence from the augmented Taylor Rules shows that the Central Bank has most likely not responded to the growth rates of M3 and the nominal effective exchange rate and the estimated regimes are robust to including these additional variables in the regressions. Finally, after the bankruptcy of Lehman Brothers the policy rate has switched to a crisis regime as the ECB has focused on preventing a further decline in economic activity and on securing the stability of the financial system.

Relying on Clive Granger's many and varied contributions to econometric analysis, this paper considers some of the key econometric considerations involved in estimating Taylor-type rules for US data. We focus on the roles of unit roots, cointegration, structural breaks, and non-linearities to make the case that most existing estimates are based on an unbalanced regression. A variety of estimates reveal that neglected cointegration results in the omission of a necessary error correction term and that Federal Reserve (Fed) reactions during the Greenspan era appear to have been asymmetric. We argue that error correction and non-linearities may be one way to estimate Taylor rules over long samples when the underlying policy regime may have changed significantly.

In this paper, six forms of non-linear Taylor rule have been applied to compare the fitting and prediction of response function of monetary policy of China, in an attempt to figure out a form of non-linear Taylor rule that accords with Chinese practices. The paper aims to discuss this issue.

In this paper, the authors will conduct in-sample fitting and out-of-sample prediction on the response function of monetary policy of China by introducing the factor of exchange rate and by applying forward-looking, backward-looking and within-quarters non-linear Taylor rule with data from the first quarter of 1994 to the second quarter of 2011, with a view to provide reference for formulation and implementation of monetary policies of China.

By analyzing the experimental data, the authors find that first, after introducing the factor of exchange rate, both the implementation effect and prediction ability of the monetary policies improve. Exchange rate has a relatively greater influence on the effect of the monetary policies during low inflation period. Introduction of exchange rate can improve the prediction accuracy of our monetary policies significantly. Second, as the implementation effect of monetary policy under different macro-background varies greatly, the situation should be correctly appraised when formulating and implementing monetary policies. According to the empirical results, the monetary policies have obvious non-linear characteristics, and transit smoothly with the change of inflation rate. On the two sides of inflation rate of 2.174 percent, there is an asymmetry response.

Surely, the conclusions are reached on the basis of quarterly data and one-step prediction method. It is no doubt that use of frequency mixing data including quarterly and monthly data will provide more sample information for studying relevant issues. And the use of multiple-step prediction method may cause a dynamic change of prediction indicators of models, which will help choose more appropriate prediction models. That is what the authors will study next.

First, by introducing exchange rate, this paper will extend non-linear Taylor rules and test its applicability and fitting effect in China. Second, figure out a non-linear Taylor rule that conforms to Chinese practices with data. In this paper, multiple forms of non-linear Taylor rules and actual macro date will be adopted for fitting and finding out a non-linear Taylor rule that fits Chinese practices. Third, empirical basis will be provided for further perfecting monetary policies prediction models. As there are few studies in connection with the prediction accuracy of non-linear Taylor rules so far, this paper will compare and study the prediction accuracy of non-linear Taylor rules by utilizing multiple advanced prediction techniques, so as to offer a beneficial thinking for predicting and formulating monetary policies by the central bank.

John Taylor devised a simple monetary policy rule that links the Federal Reserve's policy interest rate with inflation and output targets. This paper compares actual policy rates with the rates that would have been recommended by the basic Taylor Rule for three long periods in U.S. economic history: 1875–1913 (“Pre Fed”), 1914–1951 (“Early Fed”), and 1952–1998 (“Modern Fed”). In addition, the authors develop a more complex version of the Rule to facilitate a comparison of the way in which each monetary authority would have reacted to the economic challenges presented outside its own time period. The empirical evidence suggests that Modern Fed would have reacted more promptly and appropriately to inflation and output problems outside its time period than either Early Fed or Pre Fed, and that the movement of interest rates in the Pre Fed period came closer to the corrective policies of Modern Fed than did those of Early Fed.

We would like to thank C. Y. Chen, Wenchih Lee, two anonymous referees and the seminar participants at the 2000 FMA annual meeting for their helpful comments and encouragement. All of the remaining errors are our responsibility.

We analyze the determinants of the cyclical position in some Baltics and South-Eastern European countries as well as peripheral European countries over the period 2000–2013. Specifically, we consider a sample of eight economies: Croatia, Estonia, Latvia, and Lithuania for the sub-sample of Baltics and South-Eastern European economies; and Greece, Ireland, Portugal, and Spain for the sub-sample covering EMU peripheral countries. To this end, we proceed in two steps. In the first, we simulate Taylor rules for each studied countries in order to see to what extent the effective monetary policy has suffered from an expansionary bias. Such analysis is conducted for both peripheral and Central, Eastern, and South-Eastern Europe (CESE) countries. In a second step, we compare the simulated Taylor rules for our selected CESE countries with the Eurozone Taylor rule. Our contribution is threefold. First we show that the ineffectiveness of monetary policy to face imbalances – and especially financial imbalances – suggest that the EU should adopt macroprudential measures. Second, the experience of CESE and Peripheral countries suggests that fiscal policy has tended to be pro-cyclical or at least neutral. Third, we underline the importance of using the Macroeconomic Imbalance Procedure as a tool to implement automatic adjustment mechanisms.

The purpose of this paper is to discuss the potential benefits of monetary policy rules for transition economies (TEs).

The paper discusses monetary policy rules, inflation targeting, political risk and ambiguity and monetary policy and ambiguity.

It is argued that the nominal interest rate may fail to be the appropriate instrument in such rules. One reason is the amount of non‐calculable political and economic risk inherent in TEs. These risks lead to a significant and volatile‐ambiguity premium in the interest rate over and above the normal risk premium, which makes the real equilibrium interest rate difficult to measure. Furthermore, ambiguity of the public regarding the monetary policy leads to an ambiguity premium on inflation.

The paper advocates a simple monetary policy rule based on a monetary aggregate like the money base minimizes the impact of ambiguity. It may therefore be the appropriate monetary policy for TEs.

The purpose of this paper is to evaluate the performance of six types of policy rules applied for Indonesia, using monthly data spanning January 1980 to December 2008.

This paper uses deterministic simulations on a small macro model and evaluates the policy rules based on the loss function.

Among six types of policy rules, an inflation forecast‐based rule with contemporaneous output gap (IFBG) is found to be the most efficient rule for Indonesia. The rule suggests that the central bank should react strongly to inflation deviations from the target, react moderately to the output gap and smooth the interest rate. The optimal horizon is 3‐4 quarters. Including the exchange rate in the policy rule causes deterioration in economic performance.

No previous study examines Indonesia employing the same methodology.

This paper aims to examine the controversial issue of the extent to which Federal Reserve monetary policy may have contributed to the recent housing crisis and subsequent adverse macroeconomic developments.

The authors develop a small model that facilitates OLS and VAR estimates of the critical period.

The empirical results support the claim of John B. Taylor and others who held that monetary policy was excessively stimulative in terms of the low fed funds rate 2002‐2005, but also support the view of Alan Greenspan and others that the linkages between short‐term rates, long‐term rates, and the housing market deteriorated during that decade.

The model includes the Taylor Rule, a housing equation, and a mechanism linking the two relationships. The empirical results support elements of the camp that blames monetary policy for the recent housing crisis, and elements of the opposing camp which limits policy culpability. Specifically, it suggests excessive monetary ease and a structural change (for which the Fed cannot be blamed) in the monetary policy‐housing market linkage that occurred prior to the crisis. The results also support long‐term, prior crisis, channels of influence that run from the state of the economy to fed funds rates to mortgage interest rates to housing prices. A return to normalcy in the housing market should be accompanied by the re‐establishment of these channels.