Open Conference Systems, ICQQMEAS2009

Font Size: 
A THRESHOLD MODEL FOR MONETARY POLICY RULES FOR OPEN ECONOMIES
Thanassis Kazanas, Elias Tzavalis

Last modified: 2015-09-15

Abstract


This paper estimates monetary policy reaction functions that allow for open economy. The famous Taylor rule is referred to a closed economy in which the interest rate depends on the inflation and output deviations from their target values. In an open economy the interest rate depends not only on the inflation and output deviations but also on the percentage change of the real exchange rate or the nominal interest rate of a foreign country. We consider a threshold type nonlinear monetary policy model that allows the existence of two policy regimes according to whether the output gap or the level of the unemployment rate is above or below a threshold value. We estimate the threshold parameter through the method of maximum likelihood. The results reveal asymmetries in the policy reaction functions which are associated with large output gap or high level of unemployment rate

Full Text: PDF