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Non-Linear Taylor Rule through Threshold Estimation


  • Bhaduri, Saumitra
  • Sethudurai, Raja


This paper tries to identify non-linearity in the estimation of Taylor type reaction function for Reserve Bank of India using a threshold estimation technique of Hansen (2000). For the monthly data from March 2001 to October 2009 with Repo rate as the policy rate the estimation significantly identifies two thresholds with inflation and one threshold with output gap as threshold variables. We compared this model with that of a naïve univariate model and the typical Taylor type reaction function, the results are in support of the non-linear model in predicting the repo rate at turning points with more accuracy than the other two competing models.

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  • Bhaduri, Saumitra & Sethudurai, Raja, 2013. "Non-Linear Taylor Rule through Threshold Estimation," MPRA Paper 44844, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:44844

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    References listed on IDEAS

    1. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
    2. Efrem Castelnuovo, 2004. "Describing the Fed's conduct with simple Taylor rules: is interest rate smoothing important?," Money Macro and Finance (MMF) Research Group Conference 2003 12, Money Macro and Finance Research Group.
    3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    4. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
    5. Ruge-Murcia, Francisco J, 2003. " Inflation Targeting under Asymmetric Preferences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 763-785, October.
    6. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    7. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
    8. Kenneth Petersen, 2007. "Does the Federal Reserve Follow a Non-Linear Taylor Rule?," Working papers 2007-37, University of Connecticut, Department of Economics.
    9. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
    10. A. Robert Nobay & David A. Peel, 2003. "Optimal Discretionary Monetary Policy in a Model of Asymmetric Central Bank Preferences," Economic Journal, Royal Economic Society, vol. 113(489), pages 657-665, July.
    11. Franses,Philip Hans & Dijk,Dick van, 2000. "Non-Linear Time Series Models in Empirical Finance," Cambridge Books, Cambridge University Press, number 9780521770415, May.
    12. 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.
    13. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1161-1187, September.
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    More about this item


    Policy reaction function; threshold estimation; Taylor rule;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • 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

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