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A survey on time-varying parameter Taylor rule: A model modified with interest rate pass-through

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  • Yüksel, Ebru
  • Metin-Ozcan, Kivilcim
  • Hatipoglu, Ozan

Abstract

Today, the prime aim of central banking is to achieve price stability and, to a lesser extent, output stability. To this end, central banks use various monetary policy rules. This paper intends to provide a broad survey of the literature on Taylor-type monetary policy rules with a time-varying parameter (TVP) specification. To include the TVP feature, some modification is made in the monetary transmission mechanism of Taylor-type monetary policy models to account for the changing risk preference of individuals. In line with this approach, we introduce an interest rate pass-through specification of the monetary transmission process in a general equilibrium model to account for the varying perceptions of risk by individuals. We include an application for Turkey and estimate the time-variable parameters of the model by employing a structural extended Kalman filter (EKF). The results indicate that the EKF performs better than the standard Kalman filter in estimating the reaction function of the central bank.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 37 (2013)
Issue (Month): 1 ()
Pages: 122-134

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Handle: RePEc:eee:ecosys:v:37:y:2013:i:1:p:122-134

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Keywords: Extended Kalman filter (EKF); Interest rate pass-through; Monetary policy; Taylor rule; Time-varying parameter (TVP);

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Cited by:
  1. Gonzalez-Astudillo, Manuel, 2013. "Monetary-Fiscal Policy Interactions: Interdependent Policy Rule Coefficients," MPRA Paper 50040, University Library of Munich, Germany.

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