The real exchange rate in Taylor rules: A Re-Assessment

Froyen, Richard T.; Guender, Alfred V.

doi:10.1016/j.econmod.2018.03.011

Cited by 17 publications

(16 citation statements)

References 44 publications

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“…Following this literature, the first estimated Taylor rule in this paper also includes an exchange rate variable in addition to inflation gap and output gap. Froyen and Guender (2018) strongly suggest the use of real exchange rate in a Taylor rule specification and following this suggestion, we will use the real exchange rate rather than the nominal one.…”

Section: Model Imentioning

confidence: 99%

Threshold Regression Model for Taylor Rule: The Case of Turkey

Deniz

Stengos

Yazgan

2020

REA

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This paper employs the structural threshold approach of Kourtellos et al. (2016) to examine various specifications of the Taylor rule model. Contrary to the previous work on the Taylor rule, this methodology allows for endogeneity of the threshold variable in addition to the right-hand-side variables suggesting a fully comprehensive flexible framework that does not rely on restrictive linearity and/or exogeneity assumptions. In order to examine the model, Turkey is selected as an inflation targeting developing economy, since its central bank (the Central Bank of Turkey) as argued by Dincer and Eichengreen (2014) has been one of the fastest improving central banks in terms of its transparency score. We use monthly data for the period of 2004-2018 that includes a number of historical episodes such as the global financial crisis as well as various internal political developments that may have had an impact on the fluctuations of the relevant macroeconomic variables as well as on the functional form of the inflation targeting Taylor rule specification. Empirical findings highlight the different reactions of the central bank in determining policy rate under different regimes.

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Section: Model Imentioning

confidence: 99%

Threshold Regression Model for Taylor Rule: The Case of Turkey

Deniz

Stengos

Yazgan

2020

REA

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“…Taylor's rule is therefore a guideline for central banks on how to adjust interest rates in order to change economic conditions. Notwithstanding its limitations and critics, Taylor's rule has become established in central banking for adjusting and setting cautious rates for economic stabilization, while sustaining long-run growth (Akinkunmi, 2017;Branch, 2014;Froyen & Guender, 2018;Jung, 2017;Scott & Barari, 2017).…”

Section: Theoretical Frameworkmentioning

confidence: 99%

Central Banks’ Response to Inflation, Output Gap, and Exchange Rate in Nigeria and South Africa

Vincent

2021

Cogent Business & Management

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In Africa, a number of countries like South Africa have adopted inflation targeting. In Nigeria, different monetary policy regimes have been adopted over the years with rather unsatisfactory success. This study examines inflation targeting in Nigeria and South Africa, using fully modified least square to estimate a modified Taylor rule for the period 1970 to 2016. The study unravels evidence of a significant response of inflation and squared inflation to policy interest rates in South Africa, but not in Nigeria. Overall, South Africa's central bank places much emphasis on inflation targeting in setting interest rates, which Nigeria does not. Further, for South Africa, output gap is significant, while it is not significant for Nigeria. The study also reveals that exchange rate, openness to trade and international reserves play significant roles in central bank policy in both countries. In other words, there is need for central banks to adopt an eclectic approach, setting the monetary policy rule to adjust to any observed disequilibrium between output gap, inflation, exchange rate, foreign reserves and openness to trade.

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“…Greater awareness of the negative effects arising from particularly large capital flow reversals, adversely affecting the economy, has been developed recently, generating more recent specifications of the Taylor rule. These consider other important variables such as the exchange rate, asset prices, wealth indicators, interest rate spreads or credit aggregates, such as by Bernanke and Gertler (2000), Taylor (2001), Morley and Wei (2012), Froyen andGuender (2018), andCaporale et al (2018). Taylor (2001) developed an augmented Taylor rule by taking into account the exchange rate in his original baseline rule.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Some important indicators like exchange rates, asset prices, risk and other financial variables have been considered to obtain the rule with the most satisfactory performance. For instance, explorations on the role of exchange rates on the monetary transmission mechanism have been conducted by, among others, Taylor (2001), and Froyen and Guender (2018). Whilst studies by Bernanke and Gertler (2000), and Hafner and Lauwers (2015), among others, have investigated the central banks' responses to asset price movements.…”

Section: Introductionmentioning

confidence: 99%

Do Capital Flows Matter for Monetary Policy Setting in Inflation Targeting Economies?

Arimurti

Morley

2020

JRFM

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The aim of this study is to determine if capital flows can account for the international effects on domestic monetary policy, using an augmented Taylor rule model. In addition to the standard determinants of nominal interest rates, we include capital flow measures to show how central banks consider this important factor when deciding on the most appropriate monetary policy. Using a panel of inflation targeting economies and the dynamic panel approach, this study finds that capital inflows and outflows are an important determinant of nominal interest rates.

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The real exchange rate in Taylor rules: A Re-Assessment

Cited by 17 publications

References 44 publications

Threshold Regression Model for Taylor Rule: The Case of Turkey

Threshold Regression Model for Taylor Rule: The Case of Turkey

Central Banks’ Response to Inflation, Output Gap, and Exchange Rate in Nigeria and South Africa

Do Capital Flows Matter for Monetary Policy Setting in Inflation Targeting Economies?

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