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

  • Mehtap Kesriyeli
  • Denise R. Osborn
  • Marianne Sensier

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.

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File URL: http://www.tcmb.gov.tr/wps/wcm/connect/ae088530-c17d-43d6-a0da-f01a0d8e4d1a/WP0414ENG.pdf?MOD=AJPERES&CACHEID=ae088530-c17d-43d6-a0da-f01a0d8e4d1a
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Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 0414.

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Date of creation: 2004
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Handle: RePEc:tcb:wpaper:0414
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  1. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," Working Papers 97-32, C.V. Starr Center for Applied Economics, New York University.
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  4. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
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  14. 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.
  15. Nelson, Edward, 2001. "UK Monetary Policy 1972-97: A Guide Using Taylor Rules," CEPR Discussion Papers 2931, C.E.P.R. Discussion Papers.
  16. Eitrheim, Oyvind & Terasvirta, Timo, 1996. "Testing the adequacy of smooth transition autoregressive models," Journal of Econometrics, Elsevier, vol. 74(1), pages 59-75, September.
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  18. Sensier, Marianne & Osborn, Denise R & Ocal, Nadir, 2002. " Asymmetric Interest Rate Effects for the UK Real Economy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(4), pages 315-39, September.
  19. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
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  22. repec:sae:niesru:v:161:y::i:1:p:84-89 is not listed on IDEAS
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