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

37 Pages Posted: 26 Jul 2016

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Abdurrahman Nazif Catik

Ege University Department of Economics

Mohamad Helmi

Brunel University London - College of Business, Arts and Social Sciences

Faek Menla Ali

Brunel University London

Coskun Akdeniz

Ege University - Department of Economics

Date Written: June 29, 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: C130, C510, C520, E520, E580

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 29, 2016). CESifo Working Paper Series No. 5965. Available at SSRN: https://ssrn.com/abstract=2814467

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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 - College of Business, Arts and Social Sciences ( email )

Kingston Lane
Brunel University London
Middlesex, Uxbridge UB8 3PH
United Kingdom

Faek Menla Ali

Brunel University London ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

Coskun Akdeniz

Ege University - Department of Economics ( email )

Bornova, Izmir 35040
Turkey

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