The central banks’ ability to control variability of money market interest rates: The case of inflation targeting countries

• Published in: Journal of economic behavior & organization Vol. 176; pp. 384 - 402
• Main Authors: Bruna, Karel, Tran, Quang Van
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-08-2020
• Subjects: Bayesian VAR model; Inflation targeting; Interest rates; Monetary policy; Money market; Inflation targeting; Money market; E43; Monetary policy; E58; Bayesian VAR model; G17; Interest rates
• ISSN: 0167-2681; 1879-1751
• DOI: 10.1016/j.jebo.2020.04.012

It is well known that variability of money market interest rates is time variant. Further, the ability to control money market interest rates by central bank is also important for effectiveness of inflation targeting. As a contribution to understanding the transmission between main monetary policy rate and money market interest rates an innovative formal framework of money market interest rate variability reflecting variety of macroeconomic shocks was developed. Subsequently, a middle size macro-financial model with exogenous variables is estimated by the Bayesian method with sign restriction to identify main sources of macroeconomic shocks. Parameters of this model are estimated from a dataset of six countries with long-lasting history of inflation targeting. Using the estimation results, three measures of ability to control of money market interest rates are derived and they are used to compare time and country specific conditions of the effects of main policy rate on money market interest rates. We consider these measures as an important contribution for evaluating suitability of VAR models as well as the one for measuring the ability of central bank to control money market rates. Our findings are interesting and the novel approach is applicable to solve similar problem.