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Estimating the Discount Rate Policy Reaction Function of the Monetary Authority

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  • Choi, Woon Gyu

Abstract

This paper estimates a policy rule that explains the sign and the magnitude of the Federal Reserve's (Fed's) discount rate changes. It sets out a two-sided Type II Tobit model and develops a procedure for its estimation, considering the discrete and censored nature of the changes. The results suggest that the Fed has conducted discount rate policy counter-cyclically to influence output and to curb inflation, and that the Fed's response to policy indicators varies over monetary regimes. Furthermore, consistency is found between the model prediction of the discount rate change and a classification based on whether the change is technical or non-technical.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 14 (1999)
Issue (Month): 4 (July-Aug.)
Pages: 379-401

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Handle: RePEc:jae:japmet:v:14:y:1999:i:4:p:379-401

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Cited by:
  1. Choi, Woon Gyu & Wen, Yi, 2000. "Measuring Interest Rates as Determined by Thrift and Productivity," Working Papers 00-03, Cornell University, Center for Analytic Economics.
  2. Kai Carstensen, 2006. "Estimating the ECB Policy Reaction Function," German Economic Review, Verein für Socialpolitik, vol. 7, pages 1-34, 02.
  3. Roman Horvath, 2007. "The Time-Varying Policy Neutral Rate in Real Time: A Predictor for Future Inflation?," Working Papers 2007/4, Czech National Bank, Research Department.
  4. Roman Horváth, 2007. "Estimating Time-Varying Policy Neutral Rate in Real Time," Working Papers IES 2007/01, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jan 2007.
  5. Woon Gyu Choi & Yi Wen, 2010. "Dissecting Taylor rules in a structural VAR," Working Papers 2010-005, Federal Reserve Bank of St. Louis.
  6. Jiri Podpiera, 2008. "Policy Rate Decisions and Unbiased Parameter Estimation in Conventionally Estimated Monetary Policy Rules," Working Papers 2008/2, Czech National Bank, Research Department.
  7. Yongseung Jung & Woon Gyu Choi, 2003. "Optimal Monetary Policy in a Small Open Economy with Habit Formation and Nominal Rigidities," IMF Working Papers 03/5, International Monetary Fund.
  8. Jesús Otero & Manuel Ramírez Gómez, 2008. "Modeling the monetary policy reaction function of the colombian central bank," DOCUMENTOS DE TRABAJO 004650, UNIVERSIDAD DEL ROSARIO.
  9. Podpiera, Jirí, 2008. "The role of ad hoc factors in policy rate settings," Economic Modelling, Elsevier, vol. 25(5), pages 1003-1010, September.
  10. Jiri Podpiera, 2006. "The Role of Policy Rule Misspecification in Monetary Policy Inertia Debate," CERGE-EI Working Papers wp315, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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