IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

How Does Monetary Policy Change? Evidence on Inflation Targeting Countries

  • Jaromir Baxa
  • Roman Horvath
  • Borek Vasicek

We examine the evolution of monetary policy rules in a group of inflation targeting countries (Australia, Canada, New Zealand, Sweden and the United Kingdom) applying moment-based estimator at time-varying parameter model with endogenous regressors. Using this novel flexible framework, our main findings are threefold. First, monetary policy rules change gradually pointing to the importance of applying time-varying estimation framework. Second, the interest rate smoothing parameter is much lower that what previous time-invariant estimates of policy rules typically report. External factors matter for all countries, albeit the importance of exchange rate diminishes after the adoption of inflation targeting. Third, the response of interest rates on inflation is particularly strong during the periods, when central bankers want to break the record of high inflation such as in the U.K. or in Australia at the beginning of 1980s. Contrary to common wisdom, the response becomes less aggressive after the adoption of inflation targeting suggesting the positive effect of this regime on anchoring inflation expectations. This result is supported by our finding that inflation persistence as well as policy neutral rate typically decreased after the adoption of inflation targeting.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2010/02.

in new window

Date of creation: Nov 2010
Date of revision:
Handle: RePEc:cnb:wpaper:2010/02
Contact details of provider: Postal: Na Prikope 28, 115 03 Prague 1
Phone: 00420 2 2442 1111
Fax: 00420 2 2421 8522
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. repec:ltr:wpaper:2005.02 is not listed on IDEAS
  2. GORDON de BROUWER & JAMES GILBERT, 2005. "Monetary Policy Reaction Functions in Australia," The Economic Record, The Economic Society of Australia, vol. 81(253), pages 124-134, 06.
  3. Zsolt Darvas, 2012. "Monetary transmission in three central European economies: evidence from time-varying coefficient vector autoregressions," Working Papers 722, Bruegel.
  4. J. J. Dolado & R. Maria-Dolores & F. J. Ruge-Murcia, 2002. "Nonlinear Monetary Policy Rules: Some New Evidence For The Us," Economics Working Papers we022910, Universidad Carlos III, Departamento de Economía.
  5. Christopher Adam & David Cobham & Eric Girardin, 2005. "Monetary Frameworks and Institutional Constraints: UK Monetary Policy Reaction Functions, 1985-2003," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(4), pages 497-516, 08.
  6. Rafael Domenech & Mayte Ledo & David Taguas, 2000. "Some new results on interest rate rules in EMU and in the US," Working Papers 0002, BBVA Bank, Economic Research Department.
  7. Schlicht, Ekkehart & Ludsteck, Johannes, 2006. "Variance Estimation in a Random Coefficients Model," Discussion Papers in Economics 904, University of Munich, Department of Economics.
  8. Schlicht, Ekkehart, 2004. "Estimating the Smoothing Parameter in the So-Called Hodrick-Prescott Filter," IZA Discussion Papers 1054, Institute for the Study of Labor (IZA).
  9. Jansson, Per & Vredin, Anders, 2003. "Forecast-Based Monetary Policy: The Case of Sweden," International Finance, Wiley Blackwell, vol. 6(3), pages 349-80, Winter.
  10. Hondroyiannis, George & Swamy, P.A.V.B. & Tavlas, George S., 2009. "The New Keynesian Phillips Curve In A Time-Varying Coefficient Environment: Some European Evidence," Macroeconomic Dynamics, Cambridge University Press, vol. 13(02), pages 149-166, April.
  11. Benati, Luca, 2008. "Investigating inflation persistence across monetary regimes," Working Paper Series 0851, European Central Bank.
  12. Carmine Trecroci & Matilde Vassalli, 2010. "Monetary Policy Regime Shifts: New Evidence From Time-Varying Interest Rate Rules," Economic Inquiry, Western Economic Association International, vol. 48(4), pages 933-950, October.
  13. Psaradakis Zacharias & Sola Martin & Spagnolo Fabio, 2006. "Instrumental-Variables Estimation in Markov Switching Models with Endogenous Explanatory Variables: An Application to the Term Structure of Interest Rates," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(2), pages 1-31, May.
  14. Kenneth N. Kuttner, 2004. "The role of policy rules in inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 89-112.
  15. Koopman, S.J.M. & Shephard, N. & Doornik, J.A., 1998. "Statistical Algorithms for Models in State Space Using SsfPack 2.2," Discussion Paper 1998-141, Tilburg University, Center for Economic Research.
  16. Kuttner, Kenneth N. & Posen, Adam S., 1999. "Does talk matter after all? Inflation targeting and central bank behavior," CFS Working Paper Series 1999/04, Center for Financial Studies (CFS).
  17. Schlicht, Ekkehart, 1981. "A Seasonal Adjustment Principle and a Seasonal Adjustment Method Derived From this Principle," Munich Reprints in Economics 3374, University of Munich, Department of Economics.
  18. Horváth, Roman, 2009. "The time-varying policy neutral rate in real-time: A predictor for future inflation?," Economic Modelling, Elsevier, vol. 26(1), pages 71-81, January.
  19. Angela Huang & Dimitri Margaritis & David Mayes, 2001. "Monetary Policy Rules in Practice: Evidence from New Zealand," Multinational Finance Journal, Multinational Finance Journal, vol. 5(3), pages 175-200, September.
  20. Berg, Claes & Jansson, Per & Vredin, Anders, 2004. "How Useful are Simple Rules for Monetary Policy? The Swedish Experience," Working Paper Series 169, Sveriges Riksbank (Central Bank of Sweden).
  21. Canova, Fabio & Gambetti, Luca, 2009. "Structural changes in the US economy: Is there a role for monetary policy?," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 477-490, February.
  22. Luca Benati & Paolo Surico, 2009. "VAR Analysis and the Great Moderation," American Economic Review, American Economic Association, vol. 99(4), pages 1636-52, September.
  23. Toshitaka Sekine & Yuki Teranishi, 2008. "Inflation Targeting and Monetary Policy Activism," IMES Discussion Paper Series 08-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
  24. Wei Dong, 2008. "Do Central Banks Respond to Exchange Rate Movements? Some New Evidence from Structural Estimation," Working Papers 08-24, Bank of Canada.
  25. Assenmacher-Wesche, Katrin, 2006. "Estimating Central Banks' preferences from a time-varying empirical reaction function," European Economic Review, Elsevier, vol. 50(8), pages 1951-1974, November.
  26. Podpiera, Jirí, 2008. "The role of ad hoc factors in policy rate settings," Economic Modelling, Elsevier, vol. 25(5), pages 1003-1010, September.
  27. Ruby Shih & David E. A. Giles, 2006. "Modelling the Duration of Interest Rate Spells Under Inflation Targeting in Canada," Econometrics Working Papers 0605, Department of Economics, University of Victoria.
  28. Thomas Lubik & Frank Schorfheide, 2003. "Do Central Banks Respond to Exchange Rate Movements? A Structural Investigation," Economics Working Paper Archive 505, The Johns Hopkins University,Department of Economics.
  29. Shawn Chen-Yu Leu & Jeffrey Sheen, 2005. "Asymmetric Monetary Policy in Australia," Working Papers 2005.02, School of Economics, La Trobe University.
  30. Glenn D. Rudebusch, 2006. "Monetary Policy Inertia: Fact or Fiction?," International Journal of Central Banking, International Journal of Central Banking, vol. 2(4), December.
  31. Andreas Billmeier, 2009. "Ghostbusting: which output gap really matters?," International Economics and Economic Policy, Springer, vol. 6(4), pages 391-419, December.
  32. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, December.
  33. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
  34. �Zer Karagedikli & Kirdan Lees, 2007. "Do the Central Banks of Australia and New Zealand Behave Asymmetrically? Evidence from Monetary Policy Reaction Functions," The Economic Record, The Economic Society of Australia, vol. 83(261), pages 131-142, 06.
  35. Koop, Gary & Leon-Gonzalez, Roberto & Strachan, Rodney W., 2009. "On the evolution of the monetary policy transmission mechanism," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 997-1017, April.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cnb:wpaper:2010/02. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jan Babecky)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.