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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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Citations

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Cited by:
  1. 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.
  2. 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.
  3. Konstantin Kiesel & Maik Wolters, 2014. "Estimating monetary policy rules when the zero lower bound on nominal interest rates is approached," Kiel Working Papers 1898, Kiel Institute for the World Economy.
  4. Ravn, Søren Hove, 2014. "Asymmetric monetary policy towards the stock market: A DSGE approach," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 24-41.
  5. Neuenkirch, Matthias & Tillmann, Peter, 2014. "Inflation targeting, credibility, and non-linear Taylor rules," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 30-45.
  6. Tae-Hwan Kim & Christophe Muller, 2013. "A Test for Endogeneity in Conditional Quantiles," Working Papers halshs-00854527, HAL.

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