Monetary policy rules in emerging countries: Is there an augmented nonlinear taylor rule?

• Published in: Economic modelling Vol. 72; pp. 306 - 319
• Main Authors: Caporale, Guglielmo Maria, Helmi, Mohamad Husam, Çatık, Abdurrahman Nazif, Menla Ali, Faek, Akdeniz, Coşkun
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-06-2018
• Subjects: Emerging countries; Nonlinearities; Taylor rule; C52; Emerging countries; Taylor rule; E52; C13; E58; Nonlinearities; C51
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2018.02.006

This paper examines the Taylor rule in five emerging economies, namely Indonesia, Israel, South Korea, Thailand, and Turkey. In particular, it investigates whether monetary policy in these countries can be more accurately described by (i) an augmented rule including the exchange rate, as well as (ii) a nonlinear threshold specification (estimated using GMM), instead of a baseline linear rule. The results suggest that the reaction of monetary authorities to deviations from target of either the inflation or the output gap differs in terms of the size and/or statistical significance of the coefficients in the high and low inflation regimes in all countries. In particular, the exchange rate has an impact in the former but not in the latter regime. Overall, an augmented nonlinear Taylor rule appears to capture more accurately the behaviour of monetary authorities in these countries.
•We examine the Taylor rule in five emerging economies.•These are Indonesia, Israel, South Korea, Thailand, and Turkey.•A nonlinear threshold GMM specification is employed.•The response of monetary authorities is found to be different in high and low inflation regimes.•An augmented nonlinear Taylor rule is shown to provide a better fit in these countries.