How Does Monetary Policy Change? Evidence on Inflation Targeting Countries

Jaromir Baxa, Roman Horvath and Bořek Vašíček ()

Working Papers from Department of Applied Economics at Universitat Autonoma of Barcelona

Abstract: We examine the evolution of monetary policy rules in a group of inflation targeting countries(Australia, Canada, New Zealand, Sweden and the United Kingdom) applying moment- based estimator at time-varying parameter model with endogenous regressors. Using this novel flexible framework, our main findings are threefold. First, monetary policy rules change gradually pointing to the importance of applying time-varying estimation framework. Second, the interest ate smoothing parameter is much lower that what previous time-invariant estimates of policy rules typically report. External factors matter for all countries, albeit the importance of exchange rate diminishes after the adoption of inflation targeting. Third, the response of interest rates on inflation is particularly strong during the periods, when central bankers want to break the record of high inflation such as in the U.K. or in Australia at the beginning of 1980s. Contrary to common wisdom, the response becomes less aggressive after the adoption of inflation targeting suggesting the positive effect of this regime on anchoring inflation expectations. This result is supported by our finding that inflation persistence as well as policy neutral rate typically decreased after the adoption of inflation targeting.

Keywords: Taylor rule; inflation targeting; monetary policy; time-varying parameter model; endogenous regressors. (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2010-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: HOW DOES MONETARY POLICY CHANGE? EVIDENCE ON INFLATION-TARGETING COUNTRIES (2014)
Working Paper: How Does Monetary Policy Change? Evidence on Inflation Targeting Countries (2010)
Working Paper: How Does Monetary Policy Change? Evidence on Inflation Targeting Countries (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:uab:wprdea:wpdea1007

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