Specification errors, nonlinearities, and structural breaks in the Central Bank of Brazil’s reaction function

2019 ◽  
Author(s):  
Edilean Kleber da Silva Bejarano Aragón
Keyword(s):  
Central Bank ◽  
Structural Breaks ◽  
Reaction Function ◽  
Specification Errors

scholarly journals Robust monetary policy, structural breaks, and nonlinearities in the reaction function of the Central Bank of Brazil

EconomiA ◽  
2016 ◽  
Vol 17 (1) ◽  
pp. 96-113 ◽  
Author(s):  
Gabriela Bezerra de Medeiros ◽  
Marcelo Savino Portugal ◽  
Edilean Kleber da Silva Bejarano Aragón
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Structural Breaks ◽  
Reaction Function

Endogeneity of Monetary Policy Reaction Fun~tion: An Experience from Pakistan's Economy

1991 ◽  
Vol 30 (4II) ◽  
pp. 931-941
Author(s):  
M. Aynul Hasan ◽  
Qazi Masood Ahmed
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Money Supply ◽  
Relative Effectiveness ◽  
Reaction Function ◽  
Standard Result ◽  
Policy Variable ◽  
Target Values ◽  
Monetary Policy Reaction Function ◽  
Policy Reaction Function

Monetary policy, in general, refers to those steps taken by the Central Bank to achieve such broader objectives of the economy as growth, employment, external balance and price stability through changes in the money supply, interest rates and credit policies. The money supply thus created by the Central Bank should be in response to the changes in key macroeconomic target variables such as GNP, balance of payments, inflation, internal debt and unemployment. Indeed, a properly estimated monetary policy reaction function can provide useful information regarding such matters as to whether the Central Bank, in fact, has been systematically accommodating to the changes in the target variables. The reaction function can also provide insight into the question as to what should be the relevant indicators of the monetary policy. In addition, as argued by Havrilesky (1967), it may also play a crucial role in the formulation of long-term monetary policy strategy. The other important consideration in the development of a monetary policy reaction function pertains to the endogeneity of the monetary policy. As pointed out by Goldfeld and Blinder (1972), if a policy variable responds to the lagged (or expected) target values, then considering such a policy variable as exogenous would not only introduce the problem of misspecification but will also produce serious biases in the parameters estimated from those models. In particular, if the monetary policy variable happens to be strongly influenced by target variables, then the standard result of the relative effectiveness of the monetary policy vis-a-vis fiscal policy can be questionable on the grounds of reverse causation problem.

scholarly journals Testing for Asymmetric Central Bank Preferences

2018 ◽  
Vol 10 (4) ◽  
pp. 25
Author(s):  
Felix S. Nyumuah
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Developed Countries ◽  
Central Banks ◽  
Policy Implications ◽  
Less Developed Countries ◽  
Reaction Function ◽  
Policy Rule ◽  
Asymmetric Preferences ◽  
Policy Reaction Function

The linear specification of the ideal monetary policy reaction function has been questioned in recent times by researchers. They have suggested a nonlinear framework where central banks exhibit asymmetric behaviours. Despite the important policy implications of having asymmetric central bank preferences, studies have been on single-country basis focusing almost entirely on advanced economies. The aim of this study is to check the existence of asymmetric preferences on the part of central banks in the context of a panel of countries and not just a single a country. The study derives and estimates a nonlinear flexible optimal monetary policy rule, which permits zone-like as well as asymmetric behaviours using panel data from a range of countries both developed and less developed. Although the findings indicate the presence of asymmetric preferences on the output gap across less developed countries, generally, the evidence is in favour of a linear policy reaction function and symmetric central bank preferences. These findings mean that monetary policy is characterised by a linear policy rule and symmetric central bank preferences. The results also indicate that interest rate ‘smoothing’ reaction by monetary authorities is more pronounced in less developed countries than in developed ones.

Time-varying monetary policy reaction function under asymmetric preferences: revisiting the Brazilian inflation targeting experience

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Diego Ferreira ◽  
Andreza Aparecida Palma ◽  
Marcos Minoru Hasegawa
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Stochastic Volatility ◽  
Loss Function ◽  
Inflation Targeting ◽  
Reduced Form ◽  
Conditional Heteroskedasticity ◽  
Time Varying ◽  
Reaction Function ◽  
Content Type

PurposeThis paper analyzes the potential presence of time-varying asymmetries in the preference parameters of the Central Bank of Brazil during the inflation targeting regime.Design/methodology/approachGiven the econometric issues inherent to classical time-varying parameter (TVP) regressions, a Bayesian estimation procedure is implemented in order to provide more robust parameter estimates. A stochastic volatility specification is also included to take into account the potential presence of conditional heteroskedasticity.FindingsThe obtained results show that the reduced form and structural parameters were not constant during the period considered. Moreover, the subsequent analysis of the preference parameters provided evidences of short periods in which asymmetry was an important feature to the conduction of monetary policy in Brazil. Yet, during most of the sample period, the loss function was considered to be symmetrical.Originality/valueThis paper aims to contribute to the rather scarce monetary debate on time-varying central bank preferences. The study of Lopes and Aragón (2014) is, to the best of the authors’ knowledge, the only study for Brazil considering specifically TVPs. The authors applied Kalman filter estimation to data from 2000:M1 to 2011:M12. Despite the similar structure of TVPs, the present paper extends the latter study by controlling for stochastic volatility. Ignoring conditional heteroskedasticity might lead to spurious movements in time-varying variables and inaccurate inference (Hamilton, 2010). Thus, the stochastic volatility specification is included to take this issue into account. The authors follow the theoretical scheme put forward by Surico (2007) and Aragón and Portugal (2010), in which the economy is modeled from a New Keynesian perspective and the central bank loss function is assumed to be asymmetric regarding the responses to inflation and output deviations from their targets. On the empirical side, the authors propose a TVP univariate regression with stochastic volatility for the Brazilian reduced-form reaction function, following closely the Bayesian econometric procedure developed by Nakajima (2011). Given the nonlinear non-Gaussian nature of the TVP regression with stochastic volatility, the choice of a nonlinear Bayesian approach using the Markov chain Monte Carlo (MCMC) method is justified due to the intractability of the associated likelihood function (Primiceri, 2005). Finally, based on the theoretical model specification, the authors intend to recover the central bank preference parameters as to further evaluate the degree of asymmetry and its potential time-variation under the inflation targeting regime.

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