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Nonlinear monetary policy reaction functions in large emerging economies: the case of Brazil and China

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  • Fredj Jawadi
  • Sushanta Kumar Mallick
  • Ricardo Magalhães Sousa

Abstract

This article estimates monetary policy rules for two key emerging market economies: Brazil and China. It analyses whether the monetary authority reacts to changes in economic activity, financial markets, monetary conditions, the foreign exchange market and the commodity price. We assess the importance of nonlinearity using a smooth transition regression (STR) model. Using quarterly data over the time period 1990:1 to 2008:4, we find that considerations about the output gap and the real effective exchange rate (in the case of Brazil), and the inflation rate (for China) explain the nonlinear adjustment of the central bank rate. Moreover, the results suggest that central banks pursue a target range for the threshold variable rather than a specific point target. In the case of China, the McCallum rule shows that the GDP growth, the interest rate and the commodity price drive the response of the growth rate of the relevant monetary aggregate.

Suggested Citation

  • Fredj Jawadi & Sushanta Kumar Mallick & Ricardo Magalhães Sousa, 2014. "Nonlinear monetary policy reaction functions in large emerging economies: the case of Brazil and China," Applied Economics, Taylor & Francis Journals, vol. 46(9), pages 973-984, March.
    • Handle: RePEc:taf:applec:v:46:y:2014:i:9:p:973-984
    DOI: 10.1080/00036846.2013.851774
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    References listed on IDEAS

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    1. Li-gang Liu & Wenlang Zhang, 2007. "A New Keynesian Model for Analysing Monetary Policy in Mainland China," Working Papers 0718, Hong Kong Monetary Authority.
    2. Carlos Fernando Lagrota R. Lopes, 2004. "Monetary Policy And External Vulnerability In Brazil," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32nd Brazilian Economics Meeting] 071, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    3. Brisne J. V. Céspedes & Elcyon C. R. Lima & Alexis Maka & Mário J. C. Mendonça, 2005. "Measuring Monetary Policy Stance in Brazil," Discussion Papers 1128, Instituto de Pesquisa Econômica Aplicada - IPEA.
    4. Pedro Fachada, 2001. "Inflation Targeting in Brazil: Reviewing Two Years of Monetary Policy 1999/00," Working Papers Series 25, Central Bank of Brazil, Research Department.
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