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

Ansgar Belke, Joscha Beckmann and Christian Dreger

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: 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.

JEL-codes: E42 E43 E52 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100450

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