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Asymmetric Monetary Policy Rules and the Achievement of the Inflation Target: The Case of Chile

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  • Fabián Gredig
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    Abstract

    The purpose of this paper is to test empirically whether the Central Bank of Chile (CBC) has a monetary policy reaction that changes depending on the actual state of the economy. For that, we estimate a threshold model for the CBC’s policy rule that allows the existence of two policy regimes according to whether the output gap, the inflation deviation or the GDP growth is above or below a threshold value. Also, we assess the possible effects of estimated monetary policy rules in the achievement of the inflation target by simulating a standard New Keynesian Model with endogenous switching parameters. Estimations show that the monetary authority responds strongly to inflation deviations but weakly to the output gap when the gap is larger than a specific threshold value. Furthermore, there is statistical evidence that the CBC reacts faster moving the interest rate under expansion periods. These results are robust when assuming an unknown threshold value and to real-time estimation. Simulations revealthat the estimated monetary policy rule may induce an asymmetric behavior in the inflation rate and a small negative inflation bias.

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    Bibliographic Info

    Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 451.

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    Date of creation: Dec 2007
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    Handle: RePEc:chb:bcchwp:451

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    1. Dolado Juan & Pedrero Ramón María-Dolores & Ruge-Murcia Francisco J., 2004. "Nonlinear Monetary Policy Rules: Some New Evidence for the U.S," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(3), pages 1-34, September.
    2. Rodrigo Fuentes & Fabián Gredig, 2007. "Estimating the Chilean Natural Rate of Interest," Working Papers Central Bank of Chile 448, Central Bank of Chile.
    3. Pablo Gonzalez & Mauricio Tejada, 2006. "No Linealidades en la Regla de Política Monetaria del Banco Central de Chile: Una Evidencia Empírica," ILADES-Georgetown University Working Papers inv173, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
    4. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
    5. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
    6. Troy Davig & Eric M. Leeper, 2006. "Endogenous Monetary Policy Regime Change," Caepr Working Papers 2006-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    7. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
    8. Doyle, Matthew & Falk, Barry, 2010. "Do asymmetric central bank preferences help explain observed inflation outcomes?," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 527-540, June.
    9. Troy Davig & Eric M. Leeper, 2005. "Generalizing the Taylor principle," Research Working Paper RWP 05-13, Federal Reserve Bank of Kansas City.
    10. Ruge-Murcia, F.J., 2001. "A Prudent Central Banker," Cahiers de recherche 2001-07, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    11. Ruge-Murcia, Francisco J., 2004. "The inflation bias when the central bank targets the natural rate of unemployment," European Economic Review, Elsevier, vol. 48(1), pages 91-107, February.
    12. Özer Karagedikli & Kirdan Lees, 2004. "Do inflation targeting central banks behave asymmetrically? Evidence from Australia and New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP 2004/02, Reserve Bank of New Zealand.
    13. 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.
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