BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 23/2009:
Assessing McCallum and Taylor rules in a cross-section of emerging market economies
Aaron Mehrotra ()
and José R. Sánchez-Fung
Abstract: The paper estimates McCallum and Taylor monetary policy
reaction functions, and hybrids mixing instruments and targets from the two
frameworks, for 20 emerging market economies. McCallum-Taylor
specifications with an interest rate instrument and a nominal income gap
target perform better than benchmark Taylor rules in describing monetary
policy in inflation targeting economies. Estimating reaction functions for
economies operating monetary and exchange rate targeting regimes produces
mixed results, often revealing a lean with the wind behaviour. Instrument
smoothing is a feature in the monetary base and in the interest rate
reaction functions, but the exchange rate is not consistently significant.
The results from the econometric analysis are robust to using alternative
estimators.
Keywords: McCallum and Taylor rules; nominal feedback rule; monetary policy; inflation targeting; emerging markets; (follow links to similar papers)
JEL-Codes: E52; E58; F41; (follow links to similar papers)
41 pages, December 1, 2009
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