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A Survey on Time Varying Parameter Taylor Rule: A Model Modified with Interest Rate Pass Through

  • Ebru Yuksel
  • Kývýlcým Metin Ozcan
  • Ozan Hatipoglu

Today, the prime aim of central banking is to achieve price stability and, to a lesser extent, output stability. To this end, central banks use various monetary policy rules. This paper intends to provide a broad survey of the literature on Taylor-type monetary policy rules with a time-varying parameter (TVP) specification. To include the TVP feature, some modification is made in the monetary transmission mechanism of Taylor-type monetary policy models to account for the changing risk preference of individuals. In line with this approach, we introduce an interest rate pass-through specification of the monetary transmission process in a general equilibrium model to account for the varying perceptions of risk by individuals. We include an application for Turkey and estimate the time-variable parameters of the model by employing a structural extended Kalman filter (EKF). The results indicate that the EKF performs better than the standard Kalman filter in estimating the reaction function of the central bank.

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Paper provided by Bogazici University, Department of Economics in its series Working Papers with number 2012/08.

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Date of creation: Aug 2012
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Handle: RePEc:bou:wpaper:2012/08
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