Central bank inability and Taylor rule in developing countries (original) (raw)

The Taylor Rule and the Practice of Central Banking

SSRN Electronic Journal, 2000

The Taylor rule has revolutionized the way many policymakers at central banks think about monetary policy. It has framed policy actions as a systematic response to incoming information about economic conditions, as opposed to a period-by-period optimization problem. It has emphasized the importance of adjusting policy rates more than one-for-one in response to an increase in inflation. And, various versions of the Taylor rule have been incorporated into macroeconomic models that are used at central banks to understand and forecast the economy. This paper examines how the Taylor rule is used as an input in monetary policy deliberations and decision-making at central banks. The paper characterizes the policy environment at the time of the development of the Taylor rule and describes how and why the Taylor rule became integrated into policy discussions and, in some cases, the policy framework itself. Speeches by policymakers and transcripts and minutes of policy meetings are examined to explore the practical uses of the Taylor rule by central bankers. While many issues remain unresolved and views still differ about how the Taylor rule can best be applied in practice, the paper shows that the rule has advanced the practice of central banking.

Deriving the Taylor Principle when the Central Bank Supplies Money

2012

The paper presents a human-capital-based endogenous growth, cash-in-advance economy with endogenous velocity where exchange credit is produced in a decentralized banking sector, and money is supplied stochastically by the central bank. From this it derives an exact functional form for a general equilibrium `Taylor rule'. The inflation coefficient is always greater than one when the velocity of money exceeds one; velocity growth enters the equilibrium condition as a separate variable. The paper then successfully estimates the magnitude of the coefficient on inflation from 1000 samples of Monte Carlo simulated data. This shows that it would be spurious to conclude that the central bank has a reaction function with a strong response to inflation in a `Taylor principle' sense, since it is only meeting fiscal needs through the inflation tax. The paper also estimates several deliberately misspecified models to show how an inflation coefficient of less than one can result from mode...

Monetary Policy, Taylor's Rule and Instability

Metroeconomica, 2002

We analyse the dynamic behaviour of an economy where the central bank (CB) sets interest rates according to a Taylor-type policy rule. A simple model for a closed and instability-prone economy is constructed and subjected to formal dynamical analysis and numerical simulation. It is shown that a requirement for local stability is that the two response coef®cients in the policy rule be positive. Similarly, it is shown that raising the response coef®cient of the output gap increases the likeliness of the economy being stable, whereas raising the response coef®cient of the in¯ation gap has an uncertain and probably negligible effect on local stability. Self-sustained oscillations may arise for certain parameter values. Policy mistakes in the estimation of the longrun equilibrium real interest rate or potential real GDP may prevent the CB from achieving its in¯ation target. A suggestion for enhancing the stabilization capacity of Taylor-type policy rules in the context of the model presented is made. Ã We wish to thank participants at The Other Economic Conference 2000 for their valuable comments on a previous draft of this paper. In this respect, we are particularly grateful to Victoria Chick and Jan Toporowski. The Conference was organized by the Association for Heterodox Economics and took place in London, 27±28 June 2000. Finally, we wish to thank an anonymous referee for his many helpful comments and suggestions throughout the evaluation process.

Monetary Policy Rules in Emerging Countries: Is There an Augmented Nonlinear Taylor Rule

This paper examines the Taylor rule in five emerging economies, namely Indonesia, Israel, South Korea, Thailand, and Turkey. In particular, it investigates whether monetary policy in these countries can be more accurately described by (i) an augmented rule including the exchange rate, as well as (ii) a nonlinear threshold specification (estimated using GMM), instead of a baseline linear rule. The results suggest that the reaction of monetary authorities to deviations from target of either the inflation or the output gap varies in terms of magnitude and/or statistical significance across the high and low inflation regimes in all countries. In particular, the exchange rate has an impact in the former but not in the latter regime. Overall, an augmented nonlinear Taylor rule appears to capture more accurately the behaviour of monetary authorities in these countries.

Taylor principle and inflation stability in emerging market countries

Journal of Development Economics, 2010

The goal of this paper is to evaluate the validity of Taylor principle when it comes to controlling inflation in seven developing countries that use inflation targeting regimes: Brazil, Colombia, Mexico, Philippines, Poland, South Africa and Turkey. The test is based on a state-space model to determine when each country have followed the principle, then, a threshold unit root test is used to verify if the stationarity of the deviation of the expected inflation in relation to the target depends on the compliance with the Taylor principle. The results show that the compliance with the Taylor principle leads to the stationarity of the deviation of the expected inflation in relation to the target in all the cases. Furthermore, in most of the cases the non-compliance with Taylor principle leads to a non-stationary deviation of the expected inflation.

Did the Taylor Rule Stabilize Inflation in Brazil?

Social Science Research Network, 2008

This paper characterizes the monetary policy in Brazil through a forward-looking Taylor-rule-type reaction function before and after the Real plan, which stabilized inflation in July 1994. The results show that the interest rate response to inflation was greater than one-to-one before stabilization and smaller than that afterwards, hence inverting the Taylor's principle. Several robustness checks, using mainly distinct proxies for output, output gap and data frequency strongly confirm the findings.

A Modified Taylor Rule for the Central Bank of Turkey* (CBRT): 2003-2012

2014

In this paper we investigated whether the Central bank of Turkey (CBRT) followed a strict Taylor Rule during 2003-2012. We found that it has not, due to different reasons in different periods: inflation targeting policy before the global crisis and trying to achieve the joint targets of price and financial stabilities after the crisis. Furthermore we tried to formulate a modified Taylor Rule which fitted the actual courseof nominal interest rate during 2010-2012 as closely as possible. In contrast with our estimated modified Taylor Rule which indicated that the nominal interest rates were increased only by 0.49% in practice during 2010-2012, the estimated standard Taylor Rule suggested an increase of the nominal interest rates by 1.23% during 2008-2010 for each percentage change in the inflationary gap. Hence, this displayed a loose monetary policy with respect to the strict Taylor Rule. As a matter of fact, in January 2014, CBRT had to increase its policy interest rate down from 4 ...

Do the Monetary Policy Makers Follow Rules? Testing Taylor’s Rule for Nepal

Economic Journal of Nepal

The study estimates Taylor’s rule for Nepal by using the annual time series data for the period of 1988-2018. As a requirement of Taylor's rule, the output gap has been estimated by using Hodric-Perscott filter. Consumer price index has been used as measure of inflation and 91-days treasury bills rate is taken as the proxy for the short-term interest rate set by central bank of Nepal. The ordinary least square method has been used to estimate the Taylor's equation The results show that. As Augmented Dickey-Fuller test shows that all the variables used in this study are in level form. The results show that there is a positive relationship of T-bills rule with inflation output gap. Interest rate smoothing is found to be a major concern of central bank of Nepal but follows the Taylor’s rule partially.

Taylor Rule and the Macroeconomic Performance in Pakistan

The Pakistan Development Review

A near-consensus position in modern macroeconomics is that policy rules have greater advantage over discretion in improving economic performance. For developing countries in particular, simple instrument rules appear to be feasible options as pre-requisites since more sophisticated targeting rules are generally lacking. Using Pakistan’s data, this study has attempted to estimate the Taylor rule and use it as monetary policy strategy to simulate the economy. Our results indicate that the State Bank of Pakistan (SBP) has not been following the Taylor rule. In fact, the actual policy has been an extreme deviation from it. On the other hand, counterfactual simulation confirms that macroeconomic performance could have been better in terms of stability of inflation and output, had the Taylor rule been adopted as monetary policy strategy. The study also establishes that further gains are possible if the parameter values of the rule are slightly modified. JEL classification: E47, E31, E52 K...