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Nonlinearity and Structural Change in Interest Rate Reaction Functions for the US, UK and Germany

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  • M Kesriyeli
  • D R Osborn
  • M Sensier

Abstract

This paper analyses monthly values of the short-term interest rate for the US, the UK and Germany since the early 1980s in the context of possible nonlinearities and changes over time in the interest rate response to the output gap, inflation, past interest rate changes and external variables (world commodity prices and the real exchange rate). The statistical models used are of the smooth transition class, with very substantial evidence of nonlinearity and/or parameter instability uncovered in the interest rate reaction functions for all three countries. These effects are primarily associated with time and changes in interest rates, with different coefficients applying when interest rates are increasing versus when they are decreasing. The reaction function coefficients for both the US and UK are also found to change during the 1980s.

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File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/cgbcr/discussionpapers/dpcgbcr44.pdf
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Bibliographic Info

Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 44.

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Length: 31 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:man:cgbcrp:44

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References

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  1. Edward Nelson, 2000. "UK monetary policy 1972-97: a guide using Taylor rules," Bank of England working papers 120, Bank of England.
  2. Lundbergh, Stefan & Terasvirta, Timo & van Dijk, Dick, 2003. "Time-Varying Smooth Transition Autoregressive Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(1), pages 104-21, January.
  3. 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.
  4. Sensier, Marianne & Osborn, Denise R & Ocal, Nadir, 2002. " Asymmetric Interest Rate Effects for the UK Real Economy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(4), pages 315-39, September.
  5. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  6. 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.
  7. RUGE-MURCIA, Francisco J., 2001. "The Inflation Bias When the Central Bank Targets, the Natural Rate of Unemployment," Cahiers de recherche 2001-22, Universite de Montreal, Departement de sciences economiques.
  8. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," Working Paper Series in Economics and Finance 56, Stockholm School of Economics.
  9. D H Kim & D R Osborn & M Sensier, 2002. "Nonlinearity in the Fed's Monetary Policy Rule," Centre for Growth and Business Cycle Research Discussion Paper Series 18, Economics, The Univeristy of Manchester.
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  12. Eric Schaling, 1999. "The non-linear Phillips curve and inflation forecast targeting," Bank of England working papers 98, Bank of England.
  13. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  14. Gerlach, Stefan & Schnabel, Gert, 1999. "The Taylor Rule and Interest Rates in the EMU Area," CEPR Discussion Papers 2271, C.E.P.R. Discussion Papers.
  15. A. Robert Nobay & David A. Peel, 2003. "Optimal Discretionary Monetary Policy in a Model of Asymmetric Central Bank Preferences," Economic Journal, Royal Economic Society, vol. 113(489), pages 657-665, 07.
  16. Martin, Christopher & Costas Milas, 2002. "Modelling Monetary Policy: Inflation Targeting in Practice," Royal Economic Society Annual Conference 2002 137, Royal Economic Society.
  17. repec:sae:niesru:v:161:y::i:1:p:84-89 is not listed on IDEAS
  18. 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.
  19. Bec Frédérique & Ben Salem Mélika & Collard Fabrice, 2002. "Asymmetries in Monetary Policy Reaction Function: Evidence for U.S. French and German Central Banks," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 6(2), pages 1-22, July.
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Cited by:
  1. Brüggemann, Ralf & Riedel, Jana, 2011. "Nonlinear interest rate reaction functions for the UK," Economic Modelling, Elsevier, vol. 28(3), pages 1174-1185, May.
  2. Alexander Mihailov, 2007. "Does Instrument Independence Matter under the Constrained Discretionof an Inflation Targeting Goal? Lessons from UK Taylor Rule Empirics," Money Macro and Finance (MMF) Research Group Conference 2006 95, Money Macro and Finance Research Group.
  3. Otilia Boldea & Alastair R. Hall, 2009. "Estimation and Inference in Unstable Nonlinear Least Squares Models," Centre for Growth and Business Cycle Research Discussion Paper Series 126, Economics, The Univeristy of Manchester.

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