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Comment on ``Interest Rate Setting and Inflation Targeting: Evidence of a Nonlinear Taylor Rule for the United Kingdom''

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Author Info
Zisimos Koustas () (Department of Economics, Brock University)
Jean-Francois Lamarche () (Department of Economics, Brock University)

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Abstract

This paper revisits the results of Taylor and Davradakis (2006) which suggest that the Bank of England has followed a nonlinear Taylor rule in setting the short-term interest rate. Implementing the methodology of Caner and Hansen (2004) that deals with instrumental-variables estimation of threshold models and provides estimators with known and desirable properties, we obtain a reversal of their results. Our results based on an appropriate estimation strategy suggest a linear rule. The intuitive nonlinearity test proposed by Caner and Hansen (2004) was developed with dynamic panel models in mind but can be extended to time series models and fits nicely in the context of Taylor and Davradakis (2006).

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Publisher Info
Paper provided by Brock University, Department of Economics in its series Working Papers with number 0903.

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Length: 17 pages
Date of creation: Apr 2009
Date of revision: Apr 2009
Handle: RePEc:brk:wpaper:0903

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Related research
Keywords: Thresholds; Nonlinear Models; Instrumental Variables; Taylor Rule;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C87 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Econometric Software
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

References listed on IDEAS
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  1. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June. [Downloadable!] (restricted)
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  2. Inoue, Atsushi & Shintani, Mototsugu, 2006. "Bootstrapping GMM estimators for time series," Journal of Econometrics, Elsevier, vol. 133(2), pages 531-555, August. [Downloadable!] (restricted)
    Other versions:
  3. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
    Other versions:
  4. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March. [Downloadable!] (restricted)
    Other versions:
  5. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series 2003-36, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  6. Andrews, Donald W K & Monahan, J Christopher, 1992. "An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," Econometrica, Econometric Society, vol. 60(4), pages 953-66, July. [Downloadable!] (restricted)
    Other versions:
  7. Caner, Mehmet & Hansen, Bruce E., 2004. "Instrumental Variable Estimation Of A Threshold Model," Econometric Theory, Cambridge University Press, vol. 20(05), pages 813-843, October. [Downloadable!]
  8. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
  9. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  10. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June. [Downloadable!] (restricted)
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  11. Bunzel, Helle & Enders, Walter, 2005. "Is the Taylor Rule Missing? A Statistical Investigation," Staff General Research Papers 12301, Iowa State University, Department of Economics. [Downloadable!]
  12. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
    Other versions:
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