How Does Monetary Policy Change? Evidence on Inflation Targeting Countries
| Author(s): | PhDr. Jaromír Baxa Ph.D., Vašíček, Bořek prof. Roman Horváth Ph.D., Vašíček, Bořek |
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| Type: | Articles in journals with impact factor |
| Year: | 2014 |
| Number: | 0 |
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| Published in: | Macroeconomic Dynamics, 18(3), 593–630 |
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| Keywords: | Taylor rule, inflation targeting, monetary policy, time-varying parameter model, endogenous regressors. |
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| Grants: | DYME – Dynamic Models in Economics |
| 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 framework, our main findings are threefold. First, monetary policy changes gradually pointing to the importance of applying time-varying estimation framework. Second, the interest rate 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 or low inflation environment. This result is supported by our finding that inflation persistence as well as policy neutral rate typically decreased after the adoption of inflation targeting. |
