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Estimating monetary policy reaction functions using quantile regressions

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  • Wolters, Maik H.

Abstract

Monetary policy rule parameters are usually estimated at the mean of the interest rate distribution conditional on inflation and an output gap. This is an incomplete description of monetary policy reactions when the parameters are not uniform over the conditional distribution of the interest rate. I use quantile regressions to estimate parameters over the whole conditional distribution of the federal funds rate. Inverse quantile regressions are applied to deal with endogeneity. Real-time data of inflation forecasts and the output gap are used. I find significant and systematic variations of parameters over the conditional interest rate distribution. Testing for structural changes in regression quantiles shows that these parameter variations cannot be explained by preference shifts of the Fed. Asymmetric interest rate responses can rather be related to expansions and recessions and are consistent with a recession avoidance preference of the Fed during the Volcker–Greenspan era.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 34 (2012)
Issue (Month): 2 ()
Pages: 342-361

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Handle: RePEc:eee:jmacro:v:34:y:2012:i:2:p:342-361

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: Monetary policy rules; IV quantile regression; Real-time data; Asymmetries; Policy preferences;

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References

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Cited by:
  1. Schultefrankenfeld, Guido, 2010. "Forecast uncertainty and the Bank of England interest rate decisions," Discussion Paper Series 1: Economic Studies 2010,27, Deutsche Bundesbank, Research Centre.
  2. Matthias Neuenkirch & Peter Tillmann, 2012. "Inflation Targeting, Credibility and Non-Linear Taylor Rules," MAGKS Papers on Economics 201235, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  3. William Miles & Sam Schreyer, 2012. "Is monetary policy non-linear in Indonesia, Korea, Malaysia, and Thailand? A quantile regression analysis," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 26(2), pages 155-166, November.

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