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Time-varying discrete monetary policy reaction functions

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Abstract:

A novel dynamic ordered probit model with time-varying parameters is proposed to estimate a monetary policy reaction function with narrative-based monetary indicators. The estimation and inference are carried out using the Bayesian simulation-based approach. Empirically, these are the following findings. First, there is strong evidence in support that the Central Bank in Taiwan responds counter-cyclically to inflation but weaker, if any, evidence to economic growth. Secondly, the persistence and consistence in policy-making of the monetary authority is confirmed by the significance of the positive autoregressive coefficient. Although not all, the estimates of the TVP-DOP model provide, at least, partial support of time-varying parameters. Finally, the results indicate that studies of the discrete monetary policy reaction functions without explicitly considering the possible dynamics inherent in the time series data and time-variations in model parameters may be inappropriate, if not incorrect.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840500395386

Affiliations: 1: Department of Banking and Finance, Tamkang University, 151 Ying-Chun Road, Tamsui 25137, Taipei County, Taiwan 2: Department of Economics, Tamkang University, Taipei County, Taiwan

Publication date: March 10, 2006

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