Interest Rate Persistence and Monetary Policy Rule in Light of Model Uncertainty

Shou-Yung Yin; Chang-Ching Lin; Ming-Jen Chang

doi:10.1515/ger-2022-0076

Article

Interest Rate Persistence and Monetary Policy Rule in Light of Model Uncertainty

Shou-Yung Yin , Chang-Ching Lin and Ming-Jen Chang

Published/Copyright: March 28, 2023

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From the journal German Economic Review Volume 24 Issue 2

Abstract

We study how model uncertainty affects the understanding of the interest rate persistence using a generalized Taylor-rule function covering numerous submodels via model average approach. The data-driven weights can be regarded as a measure of power-sharing across monetary policy committee members. We show that the model uncertainty is important in Canada, France, and Sweden, and the implied weights indicate that the U.K. and the U.S. have a lower model uncertainty caused either by an over-influential chairman or the consistent agreement of committee members. The importance of model uncertainty can be emphasized by sequential estimation during the 2008 financial crisis.

Keywords: endogeneity; interest rate smoothing; model uncertainty; partial adjustment; policy inertia; serial correlation; Taylor-rule

JEL Classification: C52; E47; E52; E58

Corresponding author: Ming-Jen Chang, Economics, National Dong Hwa University, 1, Da-Hsueh Rd., Shou-Feng, Hualien 97401, Taiwan, E-mail: mjchang@gms.ndhu.edu.tw

Funding source: National Science Council

Award Identifier / Grant number: NSC 102-2410-H-259-005-

Acknowledgments

The authors would like to thank Christina Gerberding and Anthony Garratt for sharing real-time data. We have benefited immensely from the insightful comments provided by Shiu-Sheng Chen, Kuo-Hsuan Chin, Tai-Kuang Ho and Zong-Shin Liu as well as seminar participants at Feng Chia University, National Yunlin University of Science and Technology, and National Tsing Hua University. We appreciate the feedback and comments received from colleagues at the 21st Macroeconometric Modelling Workshop, the Taiwan Economic Association 2015 Annual Meeting, and the Taiwan Econometric Association 2020 Annual Meeting. Ming-Jen Chang thanks the National Science Council of Taiwan for financial support (NSC 102-2410-H-259-005-).

Research funding: None declared.
Author contribution: All the authors have accepted responsibility for the entire content of this submitted manuscript and approved submission.
Conflict of interest: The authors declare that they have no conflict of interest.
Ethical approval: This article does not contain any studies with human participants performed by any of the authors.

Appendix

$Figure 8: Interest rate i t , forecasted inflation rate π ̂ t + 4 | t ${\hat{\pi }}_{t+4\vert t}$ and estimated output gaps y ̂ t ${\hat{y}}_{t}$ for seven countries.$

Figure 8:

Interest rate i _t, forecasted inflation rate π ̂ t + 4 | t and estimated output gaps y ̂ t for seven countries.

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Received: 2022-07-20

Accepted: 2023-02-23

Published Online: 2023-03-28

Published in Print: 2023-05-25

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Articles in the same Issue

https://doi.org/10.1515/ger-2022-0076

Keywords for this article

endogeneity; interest rate smoothing; model uncertainty; partial adjustment; policy inertia; serial correlation; Taylor-rule