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Activity Number: 83
Type: Contributed
Date/Time: Sunday, August 4, 2013 : 4:00 PM to 5:50 PM
Sponsor: Business and Economic Statistics Section
Abstract - #309347
Title: Panel Data Regressions and New Insights on Monetary Policy Rules
Author(s): Joselito Basilio*+
Companies: University of Illinois At Chicago
Keywords: panel data ; fixed effect ; random effect ; monetary policy rule ; central bank ; Taylor rule
Abstract:

Monetary policy rules involve central banks' reaction function whereby policy interest rates respond to inflation and growth. In this study, I hypothesize that the responsiveness to inflation (or inflation coefficient in the reaction function) varies over time and across different countries. I test this by investigating the factors that can affect the responsiveness parameter using fixed and random effects models over a panel of country data. Empirical results show that the responsiveness of monetary policy to inflation is positively related to central bank independence, trade openness, flexibility of exchange rates, and level of development. However, government debt and size have ambiguous effect on the responsiveness of monetary policy to inflation. This study contributes to the empirical literature by applying panel regression techniques to a new set of cross-country data on central bank policy rates, inflation and growth and identifying the country-specific and time-specific factors that account for the variation in central banks' responsiveness to inflation.


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