Threshold Effects in the Monetary Policy Reaction Function: Evidence from Central Bank of Iran
Authors
Abstract:
Determining how monetary policy makers react to changes in key economic variables has been of major interest to monetary economists. Estimates of monetary policy rules (reaction functions) are a widely used method for doing this. Behavior differs under different policy regimes, as in rule-based systems or chronic inflation. In practice, estimates of instrument rules have been used to describe how the central bank alters its policy in response to expected macroeconomic events. In this paper we provide linear and non-linear estimates for various instrument rules for Iran. Linear estimates show that monetary policy in Iran tends to accommodate rather than counteract inflationary pressures. More generally, the estimates indicate that Central Bank of I. R. of Iran does not systematically follow any of the well-known instrument rules or hybrid types. Non-linearity tests were performed and the null hypothesis of non-linearity of the monetary policy reaction function with respect to inflation was rejected. The narrative that can be read from non-linear rule estimates is that, in the "low inflation" states expansionary policies by CBI tend to support economic activity. However, during "high inflation" periods, CBI does not exercise anti-inflation policy but such a stance cannot accommodate output growth. Monetary policy seems to be ineffective if not inappropriate in this state. JEL Classification: E4, E5 Received: 8/22/2013 Approved: 1/27/2014
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Journal title
volume 8 issue None
pages 1- 30
publication date 2013-01
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