Skip to main content
    • Aa
    • Aa


  • Jaromír Baxa (a1), Roman Horváth (a2) and Bořek Vašíček (a3)

We examine the evolution of monetary policy rules in a group of inflation-targeting countries (Australia, Canada, New Zealand, Sweden, and the United Kingdom), applying a moment-based estimator in a time-varying parameter model with endogenous regressors. From this novel flexible framework, our main findings are threefold. First, monetary policy rules change gradually, pointing to the importance of applying a time-varying estimation framework. Second, the interest-rate smoothing parameter is much lower than typically reported by previous time-invariant estimates of policy rules. External factors matter for all countries, although the importance of the exchange rate diminishes after the adoption of inflation targeting. Third, the response of interest rates to inflation is particularly strong during periods when central bankers want to break a record of high inflation, such as in the United Kingdom or Australia at the beginning of the 1980s. Contrary to common perceptions, the response becomes less aggressive after the adoption of inflation targeting, suggesting a positive anchoring effect of this regime on inflation expectations. This result is supported by our finding that inflation persistence typically decreased after the adoption of inflation targeting.

Corresponding author
Address correspondence to: Roman Horváth, Institute of Economic Studies, Charles University, Opletalova 26, 11000 Prague 1, Czech Republic; e-mail:
Linked references
Hide All

This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

Christopher Adam , David Cobham , and Eric Girardin (2005) Monetary frameworks and institutional constraints: UK monetary policy reaction functions, 1985–2003. Oxford Bulletin of Economics and Statistics 67, 497516.

Katrin Assenmacher-Wesche (2006) Estimating central banks' preferences from a time-varying empirical reaction function. European Economic Review 50, 19511974.

Jaromír Baxa , Horváth Roman , and Boek Vaíek (2013) Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy? Journal of Financial Stability 9 (1), 117138.

Luca Benati (2008) Investigating inflation persistence across monetary regimes. Quarterly Journal of Economics 123, 10051060.

Luca Benati and Paolo Surico (2009) VAR analysis and the great moderation. American Economic Review 99, 16361652.

Andreas Billmeier (2009) Ghostbusting: Which output gap really matters? International Economics and Economic Policy 6 (4), 319419.

Jean Boivin (2006) Has U.S. monetary policy changed? Evidence from drifting coefficients and real-time data. Journal of Money Credit and Banking 38, 11491173.

Fabio Canova and Luca Gambetti (2008) Structural changes in the US economy: Is there a role for monetary policy? Journal of Economic Dynamics and Control 33, 477490.

Richard Clarida , Galí Jordi , and Mark Gertler (1998) Monetary policy rules in practice: Some international evidence. European Economic Review 42, 10331067.

Richard Clarida , Galí Jordi , and Mark Gertler (2000) Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115, 147180.

Tim Cogley and Thomas Sargent (2001) Evolving post World War II U.S. inflation. In Ben S. Bernanke and Kenneth Rogoff (eds.), NBER Macroeconomics Annual, vol. 16, pp. 331388. Cambridge, MA: MIT Press.

Tim Cogley , and Thomas Sargent (2005) Drifts and volatilities: Monetary policies and outcomes in the post WWII U.S. Review of Economic Dynamics 8, 262302.

Gordon De Brouwer and James Gilbert (2005) Monetary policy reaction functions in Australia. Economic Record 81, 124134.

Rafael Domenech , Mayte Ledo , and David Taguas (2002) Some new results on the interest rate rules in EMU and in the U.S. Journal of Economics and Business 54, 431446.

Roman Horváth (2009) The time-varying policy neutral rate in real time: A predictor for future inflation? Economic Modelling 26, 7181.

Angela Huang , Dimitri Margaritis and David Mayes (2001) Monetary policy rules in practice: Evidence from New Zealand. Multinational Finance Journal 5, 175200.

Per Jansson and Anders Vredin (2003) Forecast-based monetary policy: The case of Sweden. International Finance 6, 349380.

Chang-Jin Kim (2006) Time-varying parameter models with endogenous regressors. Economics Letters 91, 2126.

Chang-Jin Kim and Charles R. Nelson (2006) Estimation of a forward-looking monetary policy rule: A time-varying parameter model using ex-post data. Journal of Monetary Economics 53, 19491966.

Mervyn King (1997) Changes in UK monetary policy: Rules and discretion in practice. Journal of Monetary Economics 39, 8187.

Gary Koop , Leon-Gonzalez Roberto , and Rodney W. Strachan (2009) On the evolution of the monetary policy transmission mechanism. Journal of Economic Dynamics and Control 33, 9971017.

Siem J. Koopman , Neil Shephard , and Jurgen A. Doornik (1999) Statistical algorithms for models in state space using SsfPack 2.2. Econometrics Journal 2, 107160.

Thomas Laubach and John C. Williams (2003) Measuring the natural rate of interest. Review of Economics and Statistics 85, 10631070.

Daniel Leigh (2008) Estimating the Federal Reserve's implicit infiation target: A state space approach. Journal of Economic Dynamics and Control 32, 20132030.

Shawn Chen-Yu Leu and Jeffrey Sheen (2006) Asymmetric monetary policy in Australia. Economic Record 82, 8596.

Thomas A. Lubik and Frank Schorfheide (2007) Do central banks respond to exchange rate movements? A structural investigation. Journal of Monetary Economics 54, 10691087.

Athanasios Orphanides (2001) Monetary policy rules based on real-time data. American Economic Review 91, 964985.

Jiri Podpiera (2008) The role of ad hoc factors in policy rate settings. Economic Modelling 25, 10031010.

Ekkehart Schlicht (1981) A seasonal adjustment principle and a seasonal adjustment method derived from this principle. Journal of the American Statistical Association 76, 374378.

Ekkehart Schlicht (2005) Estimating the smoothing parameter in the so-called Hodrick–Prescott filter. Journal of the Japan Statistical Society 35, 99119.

Rudy Shih and David E. Giles (2008) Modelling the duration of interest rate spells under inflation targeting in Canada. Applied Economics 41, 12291239.

Christopher Sims and Tao Zha (2006) Were there regime switches in US monetary policy? American Economic Review 96, 5481.

Paul Söderlind , Ulf Söderström , and Anders Vredin (2005) Dynamic Taylor rules and the predictability of interest rates. Macroeconomic Dynamics 9, 412428.

John B. Taylor (1993) Discretion versus policy rules in practice. Carnegie–Rochester Conference Series on Public Policy 39, 195214.

John B. Taylor (ed.) (1999) Monetary Policy Rules. Chicago: University of Chicago Press.

John B. Taylor (2001) The role of the exchange rate in monetary-policy rules. American Economic Review 91, 263267.

Carmine Trecroci and Matilde Vassalli (2010) Monetary policy regime shifts: New evidence from time-varying interest-rate rules. Economic Inquiry 48, 933950.

Giorgio Valente (2003) Monetary policy rules and regime shifts. Applied Financial Economics 13, 525535.

Chengsi Zhang , Denise R. Osborn , and Dong H. Kim (2008) The New Keynesian Phillips curve: From sticky inflation to sticky prices. Journal of Money, Credit and Banking 40, 667699.

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *



Full text views

Total number of HTML views: 0
Total number of PDF views: 33 *
Loading metrics...

Abstract views

Total abstract views: 185 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 21st July 2017. This data will be updated every 24 hours.