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Estimating monetary policy rules in small open economies

Author

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  • Michael S. Lee-Browne

    (The George Washington University)

Abstract

This paper presents an approach for empirically estimating long-run monetary policy rules in small open economies. The approach utilizes the cointegrated VAR methodology and statistical tests on long- and short-run relations, and investigates policy responses. An application is presented for the case of Trinidad and Tobago. The analysis reveals an empirically supported long-run monetary policy rule for the nominal exchange rate, and provides empirical evidence that oil price shocks are transmitted through the TT economy in part via the effects on US prices. Dynamic specification of the nominal exchange rate reveals significant adjustment towards the target equilibrium level, and significant effects from foreign and domestic variables save for the exchange rate. Forecast analysis reveals the significance of oil-price forecasts, and forecast-errors, on monetary policy. The parsimonious model and its parameter estimates are empirically constant and generate reliable forecasts that provide important implications for using estimated policy rules.

Suggested Citation

  • Michael S. Lee-Browne, 2019. "Estimating monetary policy rules in small open economies," Working Papers 2019-002, The George Washington University, Department of Economics, Research Program on Forecasting.
  • Handle: RePEc:gwc:wpaper:2019-001
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    File URL: https://www2.gwu.edu/~forcpgm/2019-001.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Cointegration; exogeneity; Fisher open parity; forecast-encompassing; monetary policy; PPP; small open economies; Trinidad and Tobago; UIP;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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