IDEAS home Printed from https://ideas.repec.org/a/eme/jespps/jes-06-2023-0289.html
   My bibliography  Save this article

Time-varying parameters in monetary policy rules: a GMM approach

Author

Listed:
  • Christina Anderl
  • Guglielmo Maria Caporale

Abstract

Purpose - The article aims to establish whether the degree of aversion to inflation and the responsiveness to deviations from potential output have changed over time. Design/methodology/approach - This paper assesses time variation in monetary policy rules by applying a time-varying parameter generalised methods of moments (TVP-GMM) framework. Findings - Using monthly data until December 2022 for five inflation targeting countries (the UK, Canada, Australia, New Zealand, Sweden) and five countries with alternative monetary regimes (the US, Japan, Denmark, the Euro Area, Switzerland), we find that monetary policy has become more averse to inflation and more responsive to the output gap in both sets of countries over time. In particular, there has been a clear shift in inflation targeting countries towards a more hawkish stance on inflation since the adoption of this regime and a greater response to both inflation and the output gap in most countries after the global financial crisis, which indicates a stronger reliance on monetary rules to stabilise the economy in recent years. It also appears that inflation targeting countries pay greater attention to the exchange rate pass-through channel when setting interest rates. Finally, monetary surprises do not seem to be an important determinant of the evolution over time of the Taylor rule parameters, which suggests a high degree of monetary policy transparency in the countries under examination. Originality/value - It provides new evidence on changes over time in monetary policy rules.

Suggested Citation

  • Christina Anderl & Guglielmo Maria Caporale, 2024. "Time-varying parameters in monetary policy rules: a GMM approach," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 51(9), pages 148-176, January.
  • Handle: RePEc:eme:jespps:jes-06-2023-0289
    DOI: 10.1108/JES-06-2023-0289
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1108/JES-06-2023-0289/full/html?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: no

    File URL: https://www.emerald.com/insight/content/doi/10.1108/JES-06-2023-0289/full/pdf?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: no

    File URL: https://libkey.io/10.1108/JES-06-2023-0289?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Nejla Adanur Aklan & Mehmet Nargelecekenler, 2008. "Taylor Rule in Practice: Evidence from Turkey," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(2), pages 156-166, May.
    2. repec:bla:germec:v:8:y:2007:i::p:375-398 is not listed on IDEAS
    3. Ansgar Belke & Jens Klose, 2009. "Does the ECB Rely on a Taylor Rule?: Comparing Ex-post with Real Time Data," Discussion Papers of DIW Berlin 917, DIW Berlin, German Institute for Economic Research.
    4. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    5. ZHENG, Tingguo & WANG, Xia & GUO, Huiming, 2012. "Estimating forward-looking rules for China's Monetary Policy: A regime-switching perspective," China Economic Review, Elsevier, vol. 23(1), pages 47-59.
    6. John H. Cochrane, 2011. "Determinacy and Identification with Taylor Rules," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 565-615.
    7. Partouche, H., 2007. "Time-Varying Coefficients in a GMM Framework: Estimation of a Forward Looking Taylor Rule for the Federal Reserve," Working papers 177, Banque de France.
    8. Orphanides, Athanasios & Williams, John C., 2005. "The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1927-1950, November.
    9. Zhu, Sheng & Kavanagh, Ella & O’Sullivan, Niall, 2021. "Inflation targeting and financial conditions: UK monetary policy during the great moderation and financial crisis," Journal of Financial Stability, Elsevier, vol. 53(C).
    10. Aizenman, Joshua & Hutchison, Michael & Noy, Ilan, 2011. "Inflation Targeting and Real Exchange Rates in Emerging Markets," World Development, Elsevier, vol. 39(5), pages 712-724, May.
    11. Conrad, Christian & Eife, Thomas A., 2012. "Explaining inflation-gap persistence by a time-varying Taylor rule," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 419-428.
    12. Pär Österholm, 2005. "The Taylor Rule: A Spurious Regression?," Bulletin of Economic Research, Wiley Blackwell, vol. 57(3), pages 217-247, July.
    13. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    14. Neuenkirch, Matthias & Tillmann, Peter, 2014. "Inflation targeting, credibility, and non-linear Taylor rules," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 30-45.
    15. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
    16. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    17. Paul Beaudry & Francisco Ruge‐Murcia, 2017. "Canadian inflation targeting," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1556-1572, December.
    18. Taylor Mark P. & Davradakis Emmanuel, 2006. "Interest Rate Setting and Inflation Targeting: Evidence of a Nonlinear Taylor Rule for the United Kingdom," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(4), pages 1-20, December.
    19. Carvalho, Carlos & Nechio, Fernanda & Tristão, Tiago, 2021. "Taylor rule estimation by OLS," Journal of Monetary Economics, Elsevier, vol. 124(C), pages 140-154.
    20. Adolfson, Malin, 2007. "Incomplete exchange rate pass-through and simple monetary policy rules," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 468-494, April.
    21. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    22. Papadamou, Stephanos & Sidiropoulos, Moise & Vidra, Aristea, 2018. "A Taylor Rule for EU members. Does one rule fit to all EU member needs?," The Journal of Economic Asymmetries, Elsevier, vol. 18(C), pages 1-1.
    23. Stephan Sauer & Jan‐Egbert Sturm, 2007. "Using Taylor Rules to Understand European Central Bank Monetary Policy," German Economic Review, Verein für Socialpolitik, vol. 8(3), pages 375-398, August.
    24. W. A. Razzak, 2003. "Is the Taylor Rule Really Different from the McCallum Rule?," Contemporary Economic Policy, Western Economic Association International, vol. 21(4), pages 445-457, October.
    25. Carmine Trecroci & Matilde Vassalli, 2010. "Monetary Policy Regime Shifts: New Evidence From Time‐Varying Interest Rate Rules," Economic Inquiry, Western Economic Association International, vol. 48(4), pages 933-950, October.
    26. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    27. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
    28. Kim, Chang-Jin & Nelson, Charles R., 2006. "Estimation of a forward-looking monetary policy rule: A time-varying parameter model using ex post data," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1949-1966, November.
    29. Fendel, Ralf & Frenkel, Michael & Rülke, Jan-Christoph, 2011. "'Ex-ante' Taylor rules - Newly discovered evidence from the G7 countries," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 224-232, June.
    30. Junsoo Lee & Mark C. Strazicich, 2003. "Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1082-1089, November.
    31. Batini, Nicoletta & Harrison, Richard & Millard, Stephen P., 2003. "Monetary policy rules for an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11), pages 2059-2094.
    32. Alba, Joseph D. & Wang, Peiming, 2017. "TAYLOR RULE AND DISCRETIONARY REGIMES IN THE UNITED STATES: EVIDENCE FROM A k-STATE MARKOV REGIME-SWITCHING MODEL," Macroeconomic Dynamics, Cambridge University Press, vol. 21(3), pages 817-833, April.
    33. Cinzia Alcidi & Alessandro Flamini & Andrea Fracasso, 2011. "Policy Regime Changes, Judgment and Taylor rules in the Greenspan Era," Economica, London School of Economics and Political Science, vol. 78(309), pages 89-107, January.
    34. Jonung, Lars & Fregert, Klas, 2008. "Inflation Targeting Is a Success, So Far: 100 Years of Evidence from Swedish Wage Contracts," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 2, pages 1-25.
    35. Vítor, Castro, 2011. "Can central banks' monetary policy be described by a linear (augmented) Taylor rule or by a nonlinear rule?," Journal of Financial Stability, Elsevier, vol. 7(4), pages 228-246, December.
    36. Orphanides, Athanasios, 2004. "Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 151-175, April.
    37. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June.
    38. Yüksel, Ebru & Metin-Ozcan, Kivilcim & Hatipoglu, Ozan, 2013. "A survey on time-varying parameter Taylor rule: A model modified with interest rate pass-through," Economic Systems, Elsevier, vol. 37(1), pages 122-134.
    39. repec:kap:iaecre:v:14:y:2008:i:2:p:156-166 is not listed on IDEAS
    40. Caporale, Guglielmo Maria & Helmi, Mohamad Husam & Çatık, Abdurrahman Nazif & Menla Ali, Faek & Akdeniz, Coşkun, 2018. "Monetary policy rules in emerging countries: Is there an augmented nonlinear taylor rule?," Economic Modelling, Elsevier, vol. 72(C), pages 306-319.
    41. Florens, C. & Jondeau, E. & Le Bihan, H., 2001. "Assessing GMM Estimates of the Federal Reserve Reaction Function," Working papers 83, Banque de France.
    42. Moura, Marcelo L. & de Carvalho, Alexandre, 2010. "What can Taylor rules say about monetary policy in Latin America?," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 392-404, March.
    43. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    44. Ross Kendall & Tim Ng, 2013. "Estimated Taylor Rules updated for the post-crisis period," Reserve Bank of New Zealand Analytical Notes series AN2013/04, Reserve Bank of New Zealand.
    45. Boivin, Jean, 2006. "Has U.S. Monetary Policy Changed? Evidence from Drifting Coefficients and Real-Time Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1149-1173, August.
    46. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
    47. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Caporale, Guglielmo Maria & Helmi, Mohamad Husam & Çatık, Abdurrahman Nazif & Menla Ali, Faek & Akdeniz, Coşkun, 2018. "Monetary policy rules in emerging countries: Is there an augmented nonlinear taylor rule?," Economic Modelling, Elsevier, vol. 72(C), pages 306-319.
    2. Yüksel, Ebru & Metin-Ozcan, Kivilcim & Hatipoglu, Ozan, 2013. "A survey on time-varying parameter Taylor rule: A model modified with interest rate pass-through," Economic Systems, Elsevier, vol. 37(1), pages 122-134.
    3. Baxa, Jaromír & Horváth, Roman & Vašíček, Bořek, 2013. "Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy?," Journal of Financial Stability, Elsevier, vol. 9(1), pages 117-138.
    4. Ahmad, Saad, 2016. "A multiple threshold analysis of the Fed's balancing act during the Great Moderation," Economic Modelling, Elsevier, vol. 55(C), pages 343-358.
    5. Creel, Jérôme & Hubert, Paul, 2015. "Has Inflation Targeting Changed The Conduct Of Monetary Policy?," Macroeconomic Dynamics, Cambridge University Press, vol. 19(1), pages 1-21, January.
    6. Donato Masciandaro, 2023. "How Elastic and Predictable Money Should Be: Flexible Monetary Policy Rules from the Great Moderation to the New Normal Times (1993-2023)," BAFFI CAREFIN Working Papers 23196, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    7. Zhu, Yanli & Chen, Haiqiang, 2017. "The asymmetry of U.S. monetary policy: Evidence from a threshold Taylor rule with time-varying threshold values," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 473(C), pages 522-535.
    8. repec:hal:spmain:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    9. repec:spo:wpmain:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    10. Akosah, Nana Kwame & Alagidede, Imhotep Paul & Schaling, Eric, 2020. "Testing for asymmetry in monetary policy rule for small-open developing economies: Multiscale Bayesian quantile evidence from Ghana," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).
    11. Zhang, Chengsi & Dang, Chao, 2018. "Is monetary policy forward-looking in China?," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 4-14.
    12. Travaglini, Guido, 2007. "The U.S. Dynamic Taylor Rule With Multiple Breaks, 1984-2001," MPRA Paper 3419, University Library of Munich, Germany, revised 15 Jun 2007.
    13. Andreas Beyer & Vitor Gaspar & Christina Gerberding & Otmar Issing, 2013. "Opting Out of the Great Inflation: German Monetary Policy after the Breakdown of Bretton Woods," NBER Chapters, in: The Great Inflation: The Rebirth of Modern Central Banking, pages 301-346, National Bureau of Economic Research, Inc.
    14. Käfer Benjamin, 2014. "The Taylor Rule and Financial Stability – A Literature Review with Application for the Eurozone," Review of Economics, De Gruyter, vol. 65(2), pages 159-192, August.
    15. repec:spo:wpecon:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    16. Narek Ohanyan & Aleksandr Grigoryan, 2021. "Measuring monetary policy: rules versus discretion," Empirical Economics, Springer, vol. 61(1), pages 35-60, July.
    17. utku altunöz, 2022. "Describing of central banks’ monetary policy in the context to linear and nonlinear taylor rule: the case of Turkey," Quality & Quantity: International Journal of Methodology, Springer, vol. 56(6), pages 4641-4662, December.
    18. Baxa, Jaromír & Horváth, Roman & Vašíček, Bořek, 2014. "How Does Monetary Policy Change? Evidence On Inflation-Targeting Countries," Macroeconomic Dynamics, Cambridge University Press, vol. 18(3), pages 593-630, April.
    19. Dibooglu, Sel & Erdogan, Seyfettin & Yildirim, Durmus Cagri & Cevik, Emrah Ismail, 2020. "Financial conditions and monetary policy in the US," Economic Systems, Elsevier, vol. 44(4).
    20. repec:hal:wpspec:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    21. Drakos, Anastassios A. & Kouretas, Georgios P., 2015. "The conduct of monetary policy in the Eurozone before and after the financial crisis," Economic Modelling, Elsevier, vol. 48(C), pages 83-92.
    22. Aymeric Ortmans, 2020. "Evolving Monetary Policy in the Aftermath of the Great Recession," Documents de recherche 20-01, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    23. Shen, Chung-Hua & Lin, Kun-Li & Guo, Na, 2016. "Hawk or dove: Switching regression model for the monetary policy reaction function in China," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 94-111.
    24. De Lipsis Vincenzo, 2021. "Dating Structural Changes in UK Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(2), pages 509-539, June.

    More about this item

    Keywords

    Taylor rules; Monetary policy rules; Generalised methods of moments; Time-varying parameters; C14; C52; E52; E58;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:jespps:jes-06-2023-0289. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emerald Support (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.