Time-varying discrete monetary policy reaction functions

Ho-Chuan Huang () and Shu-Chin Lin

Applied Economics, 2006, vol. 38, issue 4, 449-464

Abstract: A novel dynamic ordered probit model with time-varying parameters is proposed to estimate a monetary policy reaction function with narrative-based monetary indicators. The estimation and inference are carried out using the Bayesian simulation-based approach. Empirically, these are the following findings. First, there is strong evidence in support that the Central Bank in Taiwan responds counter-cyclically to inflation but weaker, if any, evidence to economic growth. Secondly, the persistence and consistence in policy-making of the monetary authority is confirmed by the significance of the positive autoregressive coefficient. Although not all, the estimates of the TVP-DOP model provide, at least, partial support of time-varying parameters. Finally, the results indicate that studies of the discrete monetary policy reaction functions without explicitly considering the possible dynamics inherent in the time series data and time-variations in model parameters may be inappropriate, if not incorrect.

Date: 2006
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DOI: 10.1080/00036840500395386

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