Taylor Principle under Inflation Targeting in Emerging ASEAN Economies: GMM and DSGE Approaches

Abstract

This paper aims to reassess the performances of inflation targeting adopted by emerging ASEAN countries, Indonesia, the Philippines and Thailand, by examining their monetary policy rules, both through generalized-method-of-moments (GMM) estimations of policy reaction functions and through Bayesian estimations of the New Keynesian dynamic-stochastic-general-equilibrium (DSGE) model. The main findings are summarized as follows. First, the GMM estimations identified inflation-responsive rules fulfilling the Taylor principle, with a forward-looking manner in Indonesia and Thailand and with a contemporaneous way in the Philippines. Second, the Bayesian estimations of the New Keynesian DSGE could reassure the GMM estimation results, as the former estimations produced consistent outcomes with the latter ones on the policy rate reactions to inflation with the Taylor principle.

Monetary Policy Rule and Taylor Principle in Mongolia: GMM and DSGE Approaches

“…The Mongolian coefficient of inflation responsiveness is estimated to be under 1.2 in both GMM and DSGE approaches in this study. It is rather a weaker reaction compared with those of the other Asian adopters of an inflation targeting according to the latest study of Taguchi et al (2020): 1.3 in Thailand, 1.4 in the Philippines and 1.8 in Indonesia, and further with the US Fed reaction, 2.27-2.57 exhibited by Belke and Polleit (2007). Thus there seems to be still room to investigate whether the Mongolian policy rate reaction to inflation, although fulfilling the Taylor principle, would be powerful enough to control inflation in the case of its high pressure.…”

“…These approaches could also be applied to the investigation of monetary policy rules in the other emerging market economies, as they have improved their inflation targeting management. In fact, Taguchi et al (2020) adopted the GMM and DSGE approaches for analyzing the monetary policy rules in Indonesia, the Philippines and Thailand, although their New Keynesian DSGE estimation was based on a closed economy's version. It is expected that these approaches will be used widely for examining monetary policy rules in emerging-market economies with extended versions of a New Keynesian DSGE model.…”

“…Since then, their monetary policy rules under an inflation targeting have been discussed and examined quantitatively in academic circles. The conformity to the Taylor principle, which denotes that policy rate's response to inflation as being over unity, has been identified in the adopters of an inflation targeting by the following studies: for Indonesia, Hsing (2009), Kato (2011), andTaguchi et al (2020); for Korea, Kim and Park (2006); for the Philippines, Salas (2006) and Taguchi et al (2020); and for Thailand, Kato (2011), Lueangwilai (2012), and Taguchi et al (2020). In terms of the forward-or backward-looking modes in the policy rate's response to inflation, some differences are found among the studies above: for Indonesia, a contemporaneous-and backward-looking rule in Hsing (2009) and Taguchi and Kato (2011) versus a forward-looking rule in Taguchi et al (2020); and for Thailand, a backward-and contemporaneous-looking rule in Taguchi and Kato (2011) and Lueangwilai (2012) versus a forward-looking rule in Taguchi et al (2020).…”

“…The conformity to the Taylor principle, which denotes that policy rate's response to inflation as being over unity, has been identified in the adopters of an inflation targeting by the following studies: for Indonesia, Hsing (2009), Kato (2011), andTaguchi et al (2020); for Korea, Kim and Park (2006); for the Philippines, Salas (2006) and Taguchi et al (2020); and for Thailand, Kato (2011), Lueangwilai (2012), and Taguchi et al (2020). In terms of the forward-or backward-looking modes in the policy rate's response to inflation, some differences are found among the studies above: for Indonesia, a contemporaneous-and backward-looking rule in Hsing (2009) and Taguchi and Kato (2011) versus a forward-looking rule in Taguchi et al (2020); and for Thailand, a backward-and contemporaneous-looking rule in Taguchi and Kato (2011) and Lueangwilai (2012) versus a forward-looking rule in Taguchi et al (2020). These differences might come from the ones in sample periods used in the studies: the upgrading toward forward-looking rules by using updated samples might reflect the recent improvements in forecasting and managing capacities of the adopters of an inflation targeting by accumulating experiences of operating its system.…”