A Survey on Time-Varying Parameter Taylor Rule: A Model Modified with Interest Rate Pass-Through
Posted: 26 Feb 2015
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: Suggested Citation