A Survey on Time-Varying Parameter Taylor Rule: A Model Modified with Interest Rate Pass-Through

Posted: 26 Feb 2015

See all articles by Ebru Yüksel

Ebru Yüksel

Independent

Kivilcim Metin-Ozcan

Bilkent University

Ozan Hatipoglu

Bogazici University - Department of Economics

Date Written: 2013

Abstract

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.

Keywords: Extended Kalman Filter (EKF), Interest rate pass-through, Monetary policy, Taylor rule, Time-varying parameter (TVP)

JEL Classification: E43, E52, E58

Suggested Citation

Yüksel, Ebru and Metin-Ozcan, Kivilcim and Hatipoglu, Ozan, A Survey on Time-Varying Parameter Taylor Rule: A Model Modified with Interest Rate Pass-Through (2013). Economic Systems, Vol. 37, No. 1, 2013, Available at SSRN: https://ssrn.com/abstract=2569632

Kivilcim Metin-Ozcan

Bilkent University ( email )

06533 Ankara
Turkey

Ozan Hatipoglu

Bogazici University - Department of Economics ( email )

34342 Bebek - Istanbul
Turkey

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