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

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  • M Kesriyeli
  • D R Osborn
  • M 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.

Suggested Citation

  • M Kesriyeli & D R Osborn & M Sensier, 2004. "Nonlinearity and Structural Change in Interest Rate Reaction Functions for the US, UK and Germany," Centre for Growth and Business Cycle Research Discussion Paper Series 44, Economics, The Univeristy of Manchester.
  • Handle: RePEc:man:cgbcrp:44
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    Cited by:

    1. Boldea, Otilia & Hall, Alastair R., 2013. "Estimation and inference in unstable nonlinear least squares models," Journal of Econometrics, Elsevier, vol. 172(1), pages 158-167.
    2. Cinzia Alcidi , Alessandro Flamini, Andrea Fracasso, 2005. ""Taylored rules". Does one fit (or hide) all?," IHEID Working Papers 04-2005, Economics Section, The Graduate Institute of International Studies, revised Apr 2006.
    3. baaziz, yosra, 2016. "Les règles de Taylor à l’épreuve de la révolution : cas de l’Égypte
      [The Taylor rule to the test of the revolution: the case of Egypt]
      ," MPRA Paper 69779, University Library of Munich, Germany.
    4. Brüggemann, Ralf & Riedel, Jana, 2011. "Nonlinear interest rate reaction functions for the UK," Economic Modelling, Elsevier, vol. 28(3), pages 1174-1185, May.
    5. Cinzia Alcidi & Alessandro Flamini & Andrea Fracasso, 2011. "Policy Regime Changes, Judgment and Taylor rules in the Greenspan Era," Economica, London School of Economics and Political Science, vol. 78(309), pages 89-107, January.
    6. Boinet, Virginie & Martin, Christopher, 2010. "The optimal neglect of inflation: An alternative interpretation of UK monetary policy during the "Great Moderation"," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 982-992, December.
    7. Ram Sharan Kharel & Christopher Martin & Costas Milas, 2010. "The Complex Response Of Monetary Policy To The Exchange Rate," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(1), pages 103-117, February.
    8. Mihailov, Alexander, 2005. "Has more Independence Affected Bank of England's Reaction Function under Inflation Targeting? Lessons from Taylor Rule Empirics," Economics Discussion Papers 8894, University of Essex, Department of Economics.
    9. Becker, Ralf & Osborn, Denise R. & Yildirim, Dilem, 2012. "A threshold cointegration analysis of interest rate pass-through to UK mortgage rates," Economic Modelling, Elsevier, vol. 29(6), pages 2504-2513.
    10. Laurence Copeland & Saeed Heravi, 2009. "Structural breaks in the real exchange rate adjustment mechanism," Applied Financial Economics, Taylor & Francis Journals, vol. 19(2), pages 121-134.
    11. Alexander Mihailov, 2006. "Operational independence, inflation targeting, and UK monetary policy," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 28(3), pages 395-421.
    12. Tolga Omay & Ayşegül Çorakcı & Furkan Emirmahmutoglu, 2017. "Real interest rates: nonlinearity and structural breaks," Empirical Economics, Springer, vol. 52(1), pages 283-307, February.
    13. Alexander Mihailov, 2007. "Does Instrument Independence Matter under the Constrained Discretionof an Inflation Targeting Goal? Lessons from UK Taylor Rule Empirics," Money Macro and Finance (MMF) Research Group Conference 2006 95, Money Macro and Finance Research Group.
    14. Moccero, Diego & Gnabo, Jean-Yves, 2015. "The risk management approach to monetary policy, nonlinearity and aggressiveness: the case of the US Fed," Working Paper Series 1792, European Central Bank.
    15. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2013. "Some thoughts on accurate characterization of stock market indexes trends in conditions of nonlinear capital flows during electronic trading at stock exchanges in global capital markets," MPRA Paper 49921, University Library of Munich, Germany.
    16. repec:rim:rimwps:37-07 is not listed on IDEAS

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