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Publication details

How Does Monetary Policy Change? Evidence on Inflation Targeting Countries

Journal Article

Horváth Roman, Baxa Jaromír, Vašíček B.

serial: Macroeconomic Dynamics vol.18, 3 (2014), p. 593-630

project(s): GBP402/12/G097, GA ČR

keywords: Inflation Targeting, Time-Varying Parameter Model, Endogenous Regressors

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abstract (eng):

In this paper, we examine the evolution of monetary policy rules in a group of inflation targeting countries (Australia, Canada, New Zealand, Sweden and the United Kingdom) applying moment estimator at time-varying parameter model with endogenous regressors. This methodology has several important advantages for estimation of policy rules. In particular, unlike the Markovswitching methods, it models the policy as gradually evolving rather than imposing its sudden switches from (one regime to another). It also deals with the issue of endogeneity in policy rules and delivers superior statistical properties in small samples than the traditional Kalman filtering. Our main findings are threefold. First, monetary policy changes gradually pointing to the importance of applying time-varying estimation framework. Second, the interest rate smoothing parameter is much lower that what previous time-invariant estimates of policy rules typically report.


bocek: 2012-12-21 16:10