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Does the foreign interest rate matter for monetary policy? Evidence from nonlinear Taylor rules

Listed author(s):
  • Belke, Ansgar
  • Beckmann, Joscha
  • Dreger, Christian

Abstract. Deviations of policy interest rates from the levels implied by the Taylor rule have been persistent after the turn of the century even before the financial crisis. These deviations could be due to lower real interest rates, as stated by the savings glut hypothesis as well as the apparent success of monetary policy in combating inflation. Alternatively, they might reflect the omission of relevant variables in the standard rule, such as international dependencies in the interest rate setting of central banks. By using a smooth transition regression approach for three major central banks, this paper provides evidence for nonlinear threshold dynamics. In fact, the foreign interest rate is well-suited to improve standard Taylor-Rules.

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File URL: https://www.econstor.eu/bitstream/10419/100450/1/VfS_2014_pid_880.pdf
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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2014 (Hamburg): Evidence-based Economic Policy with number 100450.

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Date of creation: 2014
Handle: RePEc:zbw:vfsc14:100450
Contact details of provider: Web page: http://www.socialpolitik.org/
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  1. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-393, March.
  2. Gerlach, Stefan & Lewis, John, 2010. "The Zero Lower Bound, ECB Interest Rate Policy and the Financial Crisis," CEPR Discussion Papers 7933, C.E.P.R. Discussion Papers.
  3. Belke, Ansgar & Klose, Jens, 2012. "Modifying Taylor Reaction Functions in Presence of the Zero-Lower-Bound – Evidence for the ECB and the Fed," Ruhr Economic Papers 343, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
  4. 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.
  5. Colin Gray, 2013. "Responding to a Monetary Superpower: Investigating the Behavioral Spillovers of U.S. Monetary Policy," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 41(2), pages 173-184, June.
  6. Ansgar Belke & Daniel Gros, 2005. "Asymmetries in Transatlantic Monetary Policy-making: Does the ECB Follow the Fed?," Journal of Common Market Studies, Wiley Blackwell, vol. 43(5), pages 921-946, December.
  7. Baillie, Richard T. & Kilic, Rehim, 2006. "Do asymmetric and nonlinear adjustments explain the forward premium anomaly?," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 22-47, February.
  8. Richard H. Clarida, 2012. "What Has—and Has Not—Been Learned about Monetary Policy in a Low‐Inflation Environment? A Review of the 2000s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 123-140, 02.
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