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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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File URL: http://mpra.ub.uni-muenchen.de/44844/1/MPRA_paper_44844.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 44844.

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Date of creation: 08 Mar 2013
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Handle: RePEc:pra:mprapa:44844
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  1. Svensson, L.E.O., 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," Papers 595, Stockholm - International Economic Studies.
  2. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  3. Lars E.O. Svensson, 2002. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Working Papers 118, Princeton University, Department of Economics, Center for Economic Policy Studies..
  4. 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, 07.
  5. Ruge-Murcia, F.J., 2001. "Inflation Targeting Under Asymmetric Preferences," Cahiers de recherche 2001-04, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  6. repec:cup:cbooks:9780521770415 is not listed on IDEAS
  7. 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.
  8. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
  9. Kenneth Petersen, 2007. "Does the Federal Reserve Follow a Non-Linear Taylor Rule?," Working papers 2007-37, University of Connecticut, Department of Economics.
  10. 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.
  11. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
  12. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
  13. 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.
  14. repec:cup:cbooks:9780521779654 is not listed on IDEAS
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