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A Realistic Model for Official Interest Rates

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  • JdD Tena
  • E. Otranto

Abstract

This paper extends the VAR methodology to examine the consequences of monetary policy decisions by considering two types of nonlinearities in the determination of official interest rates - 1) the asymmetry related to the different nature of the discrete and infrequent positive and negative interest rate movements determined by central bankers; and 2) the convexity in the transmission of policy shocks induced by the nonnegativity constraint in interest rates. For the UK, we find evidence of both types of asymmetries. Moreover, the operational independence granted to the Bank of England involved drastic changes on the interpretation of the reaction function of the monetary authority and the consequences of monetary shocks. In the US, responses to unexpected interest rate shocks are far more symmetric. Results highlight the importance of considering all types of asymmetries when studying monetary transmission.

Suggested Citation

  • JdD Tena & E. Otranto, 2008. "A Realistic Model for Official Interest Rates," Working Paper CRENoS 200802, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    • Handle: RePEc:cns:cnscwp:200802
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    More about this item

    Keywords

    monetary shocks; impulse-response functions; monetary policy;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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