The Taylor Principle and Monetary Policy Approaching a Zero Bound on Nominal Rates: Quantile Regression Results for the United States and Japan

Thanaset Chevapatrakul · Tae-Hwan Kim · Paul Mizen

46 citations0/0 files storedJournal of money credit and banking

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Economic theories and models

Abstract

This paper offers a new approach that estimates the response of interest rates to inflation and the output gap at various points (quantiles) on the conditional distribution of interest rates. This offers an improvement on empirical estimates conducted only at the mean and also allows us to test the propositions that policy shows greater aggression to inflation in the reaction function in terms of a greater response coefficient as interest rates reach low levels, and increasing aggression as the lower bound is approached. We find support for the Taylor principle, a more aggressive response to inflation than under a Taylor rule, but no detectable evidence of increasing aggression as the zero lower bound is approached in the US and Japan.

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References

1993Discretion versus policy rules in practice 1998Monetary policy rules in practice 2003Zero Bound on Interest Rates and Optimal Monetary Policy 1999Monetary Policy Rules 2000Monetary Policy and Asset Price Volatility 2004Conducting Monetary Policy at Very Low Short-Term Interest Rates 2000Three Lessons for Monetary Policy in a Low-Inflation Era 2006Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates

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2013Inflation targeting, credibility, and non-linear Taylor rules 2011Estimating Monetary Policy Reaction Functions Using Quantile Regressions 2015THE TRANSMISSION MECHANISM IN GOOD AND BAD TIMES 2015The behaviour of the bank lending channel when interest rates approach the zero lower bound: Evidence from quantile regressions 2011Probability models and robust policy rules 2015Risk Management for Monetary Policy Near the Zero Lower Bound

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