Please use this identifier to cite or link to this item: http://hdl.handle.net/1822/8221

TitleAre central banks following a linear or nonlinear (augmented) Taylor rule
Author(s)Castro, Vítor
KeywordsTaylor rule
ECB monetary policy
Financial conditions index
Nonlinearity
Smooth transition regression models
Issue dateJun-2008
PublisherUniversidade do Minho. Núcleo de Investigação em Políticas Económicas (NIPE)
CitationNIPE Working Paper; 19
Abstract(s)The Taylor rule establishes a simple linear relation between the interest rate, inflation and output gap. However, this relation may not be so simple. To get a deeper understanding of central banks' behaviour, this paper asks whether central banks are indeed following a linear Taylor rule or, instead, a nonlinear rule. At the same time, it also analyses whether that rule can be augmented with a financial conditions index containing information from some asset prices and financial variables. A forward-looking monetary policy reaction function is employed in the estimation of the linear and nonlinear models. A smooth transition model is used to estimate the nonlinear rule. The results indicate that the European Central Bank and the Bank of England tend to follow a nonlinear Taylor rule, but not the Federal Reserve of the United States. In particularm those two central banks tend to react to inflation only when inflation is above or outside their targets. Moreover, our evidence suggests that the European Central Bank is targeting financial conditions, contrary to the other two central banks. This lack of attention to the financial conditions might have made the United States and the United Kingdom more vulnerable to the recent credit crunch than the Eurozone.
TypeWorking paper
URIhttp://hdl.handle.net/1822/8221
AccessOpen access
Appears in Collections:NIPE - Documentos de Trabalho

Files in This Item:
File Description SizeFormat 
NIPE_WP_19_2008.pdfWorking Paper759,93 kBAdobe PDFView/Open

Partilhe no FacebookPartilhe no TwitterPartilhe no DeliciousPartilhe no LinkedInPartilhe no DiggAdicionar ao Google BookmarksPartilhe no MySpacePartilhe no Orkut
Exporte no formato BibTex mendeley Exporte no formato Endnote Adicione ao seu ORCID