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

39 Pages Posted: 19 Jun 2016

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University - Centre for Empirical Finance

Abdurrahman Nazif Catik

Ege University Department of Economics

Mohamad Helmi

Brunel University London

Faek Menla Ali

University of Sussex -University of Sussex Business School

Coskun Akdeniz

Ege University - Department of Economics

Date Written: June 2016

Abstract

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.

Keywords: Taylor rule, nonlinearities, emerging countries

JEL Classification: C13, C51, C52, E52, E58

Suggested Citation

Caporale, Guglielmo Maria and Catik, Abdurrahman Nazif and Helmi, Mohamad and Menla Ali, Faek and Akdeniz, Coskun, Monetary Policy Rules in Emerging Countries: Is There an Augmented Nonlinear Taylor Rule? (June 2016). DIW Berlin Discussion Paper No. 1588. Available at SSRN: https://ssrn.com/abstract=2797215 or http://dx.doi.org/10.2139/ssrn.2797215

Guglielmo Maria Caporale (Contact Author)

Brunel University - Centre for Empirical Finance ( email )

Uxbridge UB8 3PH
United Kingdom

Abdurrahman Nazif Catik

Ege University Department of Economics ( email )

Bornova, Izmir 35100
Turkey

HOME PAGE: http://akademik.ege.edu.tr/?q=en/bilgiler&id=3270

Mohamad Helmi

Brunel University London ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

Faek Menla Ali

University of Sussex -University of Sussex Business School ( email )

Falmer
Brighton, East Sussex BN1 9SL
United Kingdom

Coskun Akdeniz

Ege University - Department of Economics ( email )

Bornova, Izmir 35040
Turkey

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