A survey on time-varying parameter taylor rule: a model modified with interest rate pass-through
Author
Yüksel, E.
Metin-Ozcan, K.
Hatipoglu, O.
Date
2013Source Title
Economic Systems
Print ISSN
0939-3625
Electronic ISSN
1878-5433
Volume
37
Issue
1
Pages
122 - 134
Language
English
Type
ArticleItem Usage Stats
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136
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Abstract
Today, the prime aim of central banking is to achieve price stability and, to a lesser extent, output stability. To this end, central banks use various monetary policy rules. This paper intends to provide a broad survey of the literature on Taylor-type monetary policy rules with a time-varying parameter (TVP) specification. To include the TVP feature, some modification is made in the monetary transmission mechanism of Taylor-type monetary policy models to account for the changing risk preference of individuals. In line with this approach, we introduce an interest rate pass-through specification of the monetary transmission process in a general equilibrium model to account for the varying perceptions of risk by individuals. We include an application for Turkey and estimate the time-variable parameters of the model by employing a structural extended Kalman filter (EKF). The results indicate that the EKF performs better than the standard Kalman filter in estimating the reaction function of the central bank.
Keywords
Extended Kalman filter (EKF)Interest rate pass-through
Monetary policy
Taylor rule
Time-varying parameter (TVP)