Monetary Policy Reaction Functions of the TICKs: A Quantile Regression Approach

The purpose of this study is to investigate how the four nations of Taiwan, India, China and Korea (i.e., the TICKs member states) set interest rates in the context of policy reaction functions. It adds to the previous literature in that the empirical estimates are conducted not only at the central mean of interest rate but we also take into account the response of interest rate to inflation, output and exchange rate at various points on the conditional distribution of interest rates, hence offering the possibility to test predictions of greater or lesser aggression at different bounds of interest rate. Our results indicate the tendency of a milder response to inflation at low interest rates and greater response at higher quantiles of interest rates, where inflation is presumably higher than desired for China and South Korea and hence offers evidence for nonlinearity. While the response to inflation over the quantiles is significant for India, yet the Taylor principle is less likely to hold. For Taiwan, the results imply that another instrument is employed to deal with its official managed floating currency.