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

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  • Mehtap Kesriyeli
  • Denise R. Osborn
  • Marianne 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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Bibliographic Info

Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 0414.

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Date of creation: 2004
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Handle: RePEc:tcb:wpaper:0414

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Cited by:
  1. Boldea, Otilia & Hall, Alastair R., 2010. "Estimation and inference in unstable nonlinear least squares models," MPRA Paper 23150, University Library of Munich, Germany.
  2. Alexander Mihailov, 2005. "Has More Independence Affected Bank of England's Reaction Function under Inflation Targeting? Lessons from Taylor Rule Empirics," Economics Discussion Papers, University of Essex, Department of Economics 601, University of Essex, Department of Economics.
  3. Brüggemann, Ralf & Riedel, Jana, 2011. "Nonlinear interest rate reaction functions for the UK," Economic Modelling, Elsevier, Elsevier, vol. 28(3), pages 1174-1185, May.

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