Publication detail

How Does Monetary Policy Change? Evidence on Inflation Targeting Countries

Author(s): PhDr. Jaromír Baxa Ph.D., Bořek Vašíček
prof. Roman Horváth Ph.D., Bořek Vašíček
Type: IES Working Papers
Year: 2010
Number: 26
ISSN / ISBN:
Published in: IES Working Papers 26/2010
Publishing place: Prague
Keywords: Taylor rule, inflation targeting, monetary policy, time-varying parameter model, endogenous regressors
JEL codes: E43, E52, E58
Suggested Citation: Baxa, J., Horváth, R., Vašíček, B. (2010). “How Does Monetary Policy Change? Evidence on Inflation Targeting Countries” IES Working Paper 26/2010. IES FSV. Charles University.
Grants: 402/09/H045 - Nelineární dynamika v peněžní ekonomii a financích. Teorie a empirické modely GAUK 46108: New Nonlinear Capital Markets Theories: Fractal, Bifurcational and Behavioral Approach
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 a moment-based estimator in a 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 a time-varying estimation framework. Second, the interest rate smoothing parameter is much lower than typically reported by previous time-invariant estimates of policy rules. External factors matter for all countries, although the importance of the exchange rate diminishes after the adoption of inflation targeting. Third, the response of interest rates to inflation is particularly strong during periods when central bankers want to break a record of high inflation, such as in the UK or Australia at the beginning of the 1980s. Contrary to common wisdom, the response becomes less aggressive after the adoption of inflation targeting, suggesting a positive anchoring effect of this regime on inflation expectations. This result is supported by our finding that inflation persistence as well as the policy neutral rate typically decreased after the adoption of inflation targeting.
Downloadable: WP 2010_26_Baxa, Horvath, Vasicek

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