Threshold Regression Model for Taylor Rule: The Case of Turkey

Abstract

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.

Türkiye’de Para Politikasının Maliyet İtişli Şoklara Tepkisi: Rüzgâra Karşı Bir Duruş mu?

“…This result confirms the smoothness in interest rate adjustment for the CBRT. Table 5 provides evidence that the CBRT responds non-linearly to inflation, output, and the real exchange rate gaps and the results are consistent with Deniz et al (2020)'s finding that the CBRT has changed in its policy behavior under different regimes. The inflation gap coefficient is positive and significant in the high OP and high IPI regime, and its size is similar.…”

“…CBRT introduces a policy that suppresses aggregate demand and prevents possible inflationary pressures from here. Deniz et al (2020) examines the specifications of the Taylor rule model employing the structural threshold approach in Turkey. They preferred the real exchange rate as a threshold variable in their standard Taylor rule model.…”

Fed Up With The Rules; Empirical Testing of the Taylor rule in the United States

“…The second model takes the original Taylor rule into account in addition to the country's real interest rate. In this study, both models proxy inflation with the annual percent change of CPI while the output gap is represented by the HP filter of logarithmic output (Deniz, Stengos and Yazgan, 2020).…”