Three essays on monetary policy modeling : applications of inflation targeting
Author
Yüksel, Ebru
Advisor
Metin-Özcan, Kıvılcım
Date
2008Publisher
Bilkent University
Language
English
Type
ThesisItem Usage Stats
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Abstract
This dissertation is made up of three essays on modeling monetary
policy in a New Keynesian framework. The first essay presents an overview of
the evolution of New Keynesian view. Since most of the studies in monetary
policy literature employ New Keynesian models due to their power in
accounting for price rigidities, microeconomic foundations and various
monetary policy rules; such a survey improves our understanding of the type of
theoretical and empirical research that has so far been conducted to analyze
monetary policy within a New Keynesian framework. This first essay also
gives a detailed derivation of structural relationships developed from
microfoundations.
The second essay examines the behavior of Taylor-type monetary
policy rule by introducing interest rate pass-through in a New Keynesian
setting with backward looking components. A simulation is performed to
analyze the behavior of policy instrument and pass-through relationship under
inflation targeting. The main contribution of this essay is the introduction of
interest rate pass-through into a New Keynesian structural model for the first
time. Besides, as differently from the previous literature, the structural model allows for time-varying parameters (TVP) not only for the parameters of the
monetary policy rule but also for the coefficients of the interest rate passthrough
and other dynamics of the system. This is a salient feature of the
analysis here, since previous studies in this field typically allow for variation
over time of parameters of the monetary policy rule alone. However, having
TVP specification for all parameters of the model provides the flexibility of
examining the impact of policy changes over the monetary policy rule, interest
rate pass-through and other dynamics of the system. The last important aspect
of the second essay is the use of Extended Kalman Filter (EKF) as the
estimation technique. That EKF is not widely employed for estimating nonlinear
systems in this field makes this study significant in demonstrating the
strength of EKF in predicting TVP models. The results of the simulations
carried out within this essay revealed that long-term interest rate and interest
rate pass-through specification are essential ingredients to be included in
monetary policy analysis.
The last essay investigates whether inflation targeting programs have
altered the pattern of inflation and its variability for five developed countries
and four emerging economies implementing inflation targeting programs. A
generalized autoregressive conditional heteroscedasticity (GARCH)
specification is used to model inflation variability, which accounts for public
perception of the future levels of inflation variability − conditional variance.
We found that implementation of inflation targeting program has changed the
public perception towards inflation only in Australia, Chile, Sweden and the
UK, indicating limited empirical support for the lower inflation and its
variability for the inflation targeting regimes.
Keywords
EKFNew Keynesian Framework
Monetary Policy Analysis
Microfoundations
Interest Rate Pass-Through
Inflation Variability
Inflation Targeting
GARCH