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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.

Suggested Citation

  • Ho-Chuan Huang & Shu-Chin Lin, 2006. "Time-varying discrete monetary policy reaction functions," Applied Economics, Taylor & Francis Journals, vol. 38(4), pages 449-464.
  • Handle: RePEc:taf:applec:v:38:y:2006:i:4:p:449-464
    DOI: 10.1080/00036840500395386
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    References listed on IDEAS

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    1. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2003. "Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability," Proceedings, Federal Reserve Bank of Cleveland, pages 1379-1423.
    2. Carlo Altavilla, 2003. "Assessing monetary rules performance across EMU countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(2), pages 131-151.
    3. 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.
    4. 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.
    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. Dimitrakopoulos, Stefanos & Dey, Dipak K., 2017. "Discrete-response state space models with conditional heteroscedasticity: An application to forecasting the federal funds rate target," Economics Letters, Elsevier, vol. 154(C), pages 20-23.
    2. 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.
    3. 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.
    4. F. Zagonari, 2015. "Coherence, efficiency, and independence of the EU environmental policy system: results of complementary statistical and econometric analyses," Working Papers wp992, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Kondo, Kazumine, 2011. "Have credit rating agencies become more stringent towards Japanese regional banks?," MPRA Paper 30500, University Library of Munich, Germany.
    6. 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.

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