Assessing Mccallum and Taylor Rules in a Cross-Section of Emerging Market Economies

41 Pages Posted: 31 Dec 2009

See all articles by Aaron N. Mehrotra

Aaron N. Mehrotra

Bank for International Settlements (BIS)

José R. Sánchez-Fung

Kingston University - School of Economics

Date Written: December 18, 2009

Abstract

The paper estimates McCallum and Taylor monetary policy reaction functions, and hybrids mixing instruments and targets from the two frameworks, for 20 emerging market economies. McCallum-Taylor specifications with an interest rate instrument and a nominal income gap target perform better than benchmark Taylor rules in describing monetary policy in inflation targeting economies. Estimating reaction functions for economies operating monetary and exchange rate targeting regimes produces mixed results, often revealing a lean with the wind behaviour. Instrument smoothing is a feature in the monetary base and in the interest rate reaction functions, but the exchange rate is not consistently significant. The results from the econometric analysis are robust to using alternative estimators.

Keywords: McCallum and Taylor rules, nominal feedback rule, monetary policy, inflation targeting, emerging markets

JEL Classification: E52, E58, F41

Suggested Citation

Mehrotra, Aaron N. and Sánchez-Fung, José R., Assessing Mccallum and Taylor Rules in a Cross-Section of Emerging Market Economies (December 18, 2009). BOFIT Discussion Paper No. 23/2009, Available at SSRN: https://ssrn.com/abstract=1529946 or http://dx.doi.org/10.2139/ssrn.1529946

Aaron N. Mehrotra (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

José R. Sánchez-Fung

Kingston University - School of Economics ( email )

Penrhyn Road
Kingston-upon-Thames
Surrey, KT1 2EE
United Kingdom

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