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Time-varying discrete monetary policy reaction functions

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  • Ho-Chuan Huang
  • Shu-Chin Lin

Abstract

A novel dynamic ordered probit model with time-varying parameters is proposed to estimate a monetary policy reaction function with narrative-based monetary indicators. The estimation and inference are carried out using the Bayesian simulation-based approach. Empirically, these are the following findings. First, there is strong evidence in support that the Central Bank in Taiwan responds counter-cyclically to inflation but weaker, if any, evidence to economic growth. Secondly, the persistence and consistence in policy-making of the monetary authority is confirmed by the significance of the positive autoregressive coefficient. Although not all, the estimates of the TVP-DOP model provide, at least, partial support of time-varying parameters. Finally, the results indicate that studies of the discrete monetary policy reaction functions without explicitly considering the possible dynamics inherent in the time series data and time-variations in model parameters may be inappropriate, if not incorrect.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 38 (2006)
Issue (Month): 4 ()
Pages: 449-464

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Handle: RePEc:taf:applec:v:38:y:2006:i:4:p:449-464

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  1. Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 2003. "Backward-Looking Interest Rate Rules, Interest Rate Smoothing and Macroeconomic Instability," CEPR Discussion Papers 3928, C.E.P.R. Discussion Papers.
  2. Chung-Hua Shen, 2000. "Estimation of a Taiwan monetary reaction function with time varying parameters," Applied Economics, Taylor & Francis Journals, vol. 32(4), pages 459-466.
  3. Carlo Altavilla, 2001. "Assessing Monetary Rules Performance across EMU Countries," International Economics Working Papers Series ces0108, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
  4. Dolado, Juan J. & Maria-Dolores, Ramon & Naveira, Manuel, 2005. "Are monetary-policy reaction functions asymmetric?: The role of nonlinearity in the Phillips curve," European Economic Review, Elsevier, vol. 49(2), pages 485-503, February.
  5. Chung-Hua Shen & David R. Hakes & Kenneth Brown, 1999. "Time-Varying Response of Monetary Policy to Macroeconomic Conditions," Southern Economic Journal, Southern Economic Association, vol. 65(3), pages 584-593, January.
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Cited by:
  1. Ansgar Belke & Thorsten Polleit, 2007. "How the ECB and the US Fed set interest rates," Applied Economics, Taylor & Francis Journals, vol. 39(17), pages 2197-2209.
  2. Kondo, Kazumine, 2011. "Have credit rating agencies become more stringent towards Japanese regional banks?," MPRA Paper 30500, University Library of Munich, Germany.
  3. Belke, Ansgar & Polleit, Thorsten, 2006. "How the ECB and US Fed set interest rates," Frankfurt School - Working Paper Series 72, Frankfurt School of Finance and Management.
  4. Xiong, Weibo, 2012. "Measuring the monetary policy stance of the People's bank of china: An ordered probit analysis," China Economic Review, Elsevier, vol. 23(3), pages 512-533.

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