Monetary Policy Reaction Functions in Small Open Economies: A Quantile Regression Approach

20 Pages Posted: 19 Feb 2014

See all articles by Thanaset Chevapatrakul

Thanaset Chevapatrakul

Nottingham University Business School

Juan Paez‐Farrell

Loughborough University

Date Written: March 2014

Abstract

We use quantile regressions to model monetary policy reaction functions in three small open economies: Australia, Canada and New Zealand. Focusing on Taylor‐type rules, we find evidence of asymmetric interest rate responses for all the countries considered, with monetary policy reacting more strongly to inflation when interest rates are high than when they are low. This is consistent with previous research suggesting that central bankers place more weight on positive deviations of inflation from its target than negative ones. In contrast, the interest rate response to the output gap is largely symmetric and small.

Suggested Citation

Chevapatrakul, Thanaset and Paez‐Farrell, Juan, Monetary Policy Reaction Functions in Small Open Economies: A Quantile Regression Approach (March 2014). The Manchester School, Vol. 82, Issue 2, pp. 237-256, 2014, Available at SSRN: https://ssrn.com/abstract=2398150 or http://dx.doi.org/10.1111/manc.12014

Thanaset Chevapatrakul

Nottingham University Business School ( email )

Jubuliee Campus
Wollaton Road
Nottingham, Nottinghamshire NG8 1BB
Great Britain

Juan Paez‐Farrell

Loughborough University

No Address Available

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