A survey on time-varying parameter taylor rule : a model modified with interest rate pass-through

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Author
Yüksel, E.
Metin-Ozcan, K.
Hatipoglu, O.
Date
2013Journal Title
Economic Systems
ISSN
0939-3625 (print) 1878-5433 (online)
Volume
37
Issue
1
Pages
122 - 134
Language
English
Type
Article
Metadata
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http://hdl.handle.net/11693/21050Abstract
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.