Asymmetries in the monetary policy reaction function: evidence from India

This paper analyzes the reaction function of monetary authority in India from 1997Q 1 to 2019Q 4 using nonlinear Taylor rule. It has been found that monetary policy reaction function (MPRF) in India is asymmetric and is influenced by the state of the economy, determined by the lagged interest rate. To capture such asymmetry, we have used a set of nonlinear models including smooth transition regression (STR) model, threshold regression (TR) model and Markov-switching regression (MSR) model along with the instrumental variable estimation technique. The analysis discloses that the behaviour of the Reserve Bank of India (RBI) is asymmetric, reacts aggressively to output gap in general and particularly during periods of high interest rate. Furthermore, the RBI reacts more to inflation and output gap during low volatile regimes in MSR models compared to high volatile regimes. We also found that there is a high degree of inertia in the policy rates of the RBI. The study concludes that nonlinear models may not only help in understanding the behaviour of the RBI but also prevent from making incorrect and misleading conclusions in Indian context.

Turkish Housing Market Dynamics: An Estimated DSGE Model

In this article, we investigate the underlying driving dynamics behind house price variations in Turkey by estimating a dynamic stochastic general equilibrium (DSGE) model in which the housing market and collateral constraints are included. The model also analyses the interaction between macroeconomic variables and the housing market by making policy simulations under different loan-to-value (LTV) ratios, which are used as a housing market-specific economic policy tool. The model is extended by including the traditional Taylor rule with house prices for representing monetary policy. Our findings show that house prices in Turkey are largely explained by housing preference shocks. Besides, we find that monetary policy shock plays a small role in determining the variables of the housing market in the short-term period. However, the magnitude of the impact of housing market shocks on the rest of the economy depends on the LTV ratios. The higher the LTV ratio, the higher are the effects of the government’s housing policy instrument for stabilising the housing market on real macroeconomic variables such as consumption and output in Turkey. Finally, our findings show that the fluctuations in house prices have not played a substantial role in the monetary policy reaction function of Turkey. JEL Codes: E32, E52, E44, E51, R31

MONETARY POLICY RULES IN MALAYSIA, SINGAPORE AND THAILAND

This paper investigates whether monetary policies in Malaysia, Thailand and Singapore are best represented by either the Taylor rule or the augmented Taylor rule. It finds that the augmented Taylor rule, which incorporates the exchange rate and government spending, best represents monetary policies in these countries. The results show that past inflation and the output gap play a role in the monetary policy reaction function in Malaysia and Thailand. The results further show a strong preference towards interest rate smoothing, government spending, and the exchange rate by the central banks.

Monetary Policy Reaction Function in Positive and Normative Approaches: Evidence from ASEAN-3

A notable feature in many mainstream economic theories and empirical works of literature has been emphasized the conventional development in the domestic economic factors in dealing with monetary policy in both positive and normative approaches. However, external economic factors consist of potentially valuable information, such as the exchange rate and terms of trade, that cannot simply be ignored. To address this limitation, this study examines the monetary policy reaction function in an open economic model in both positive and normative approaches that encompasses the domestic and external factors, namely the inflation, the output gap, the exchange rate and the terms of trade. The empirical validity is obtained by using a sample of ASEAN-3 countries. Both the positive and normative approaches adopt the generalized method of moments and the grid search method, respectively. The findings deliver some policy implications; monetary policy via interest rate remains an important strategy in absorbing shocks from domestic and external factors, and the central bank should include important factors, namely the inflation, the output gap, the exchange rate and the terms of trade, in its monetary policy decision making that eventually help to attain the best economic outcomes.

MONETARY POLICY RULES AND MACROECONOMIC STABILITY: EVIDENCE FROM SRI LANKA

This study estimates the forward-looking monetary policy reaction function for SriLanka using monthly data from 1980 to 2017. The results indicate that the CentralBank of Sri Lanka (CBSL) followed the Taylor rule to set interest rates. Our forwardlookingmodel estimations show that the coefficient on inflation increases over time,reflecting the greater focus on price stability by the bank. The results suggest that theCBSL reacted to nominal exchange rate depreciation by tightening monetary policy.Although the degree of interest rate smoothness gradually decreases over time, thestudy shows that the CBSL did not react to movements in fiscal deficit during theperiod under investigation. This finding suggests that the inclusion of fiscal deficit inthe Taylor rule does not provide a better specification of the policy reaction functionin Sri Lanka.