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Can Taylor Rule be a Good Representation of Monetary Policy Function for ASEAN5?

Affiliations

  • School of Mathematical Sciences, University Sains Malaysia, Minden – 11800, Penang, Malaysia

Abstract


Objectives: This paper examines whether monetary policy in ASEAN5 can be more accurately described by the baseline Taylor rule or instead by the augmented Taylor rule with exchange rate. Then, we performed empirical analyses to estimate the policy function in asymmetric form to detect the nonlinearity elements. Finally, we also investigate if there is any intervention of policymaker through policy rate adjustments in response to exchange rate changes. Methods/Statistical Analysis: The nonlinear augmented distributed lags model (NARDL) is applied to capture the asymmetric effect of policy reaction function to exchange rate changes using data ranging from 1980 to 2015. The estimations applied two different approaches, i.e. the time series data for each individual ASEAN5 and the combined all ASEAN5 data in a panel set using Pooled Mean Group (PMG) method. Findings: Empirical analyses from both these methods conjectured that the augmented Taylor rule with exchange rate term reflects the monetary policy rule in ASEAN5. Concurrently, all the ASEAN5 countries are actively responding to exchange rate changes with higher or lower policy rates. This affirms that the policy rates are adjusted asymmetrically to exchange rate changes in the long-run. Nevertheless, majority of these countries implementing inflation targeting strategy, policymakers are still skeptical to allow much fluctuation in their exchange rates through intervention with “fear of floating” behaviour.

Keywords

ASEAN5, Exchange Rate, Monetary Policy, Taylor Rule.

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