Monetary Policy-Maker Reaction Function in Oil Exporting Countries: STR Econometric Approach

Document Type : Research Paper

Authors

1 Associate Professor of Economics, Payame Noor University (PNU), Tehran, Iran.

2 Professor of Economics, Faculty of Economics, University of Tehran, Iran.

3 Ph.D. Candidate of Economics, Payame Noor University (PNU), Tehran, Iran.

Abstract

Objective: This study is trying to analyze the behavior of monetary policymakers with using Taylor's rule. Policy rules express how monetary policy tools respond to changes in state variables. In recent decades, has been one of the main and mental preoccupations of monetary economists  hat how monetary policymakers react to key economic variables and has led to more studies on the formulation and evaluation of monetary policy rules.
Method: Since it is not expected to have a linear relationship between the variables of the model due to the existence of successive structural changes and changes in the political regime, therefore, the smooth transition threshold regression model (STR) has been used for respect to the variables of oil price changes, official exchange rate changes, inflation gap and production gap in the annual period from 2002 to 2019. It should be noted that the variables used in estimating the models are based on the degree of stationarity of the variables. According to the econometric literature, before any estimation, in order to prevent the occurrence of false regressions, it is necessary to ensure that the variables are stationary. For this purpose, the generalized Dickey-Fuller unit root test (ADF) has been used. The results obtained in table (1) show that in all the studied countries, the production gap variables, official exchange rate changes, inflation gap, oil price changes and nominal interest rate changes (for Iran; real interest rate changes) in The surface is static. In the next step, to estimate an STR model, it is necessary to determine the optimal interval for the model variables. After determining the optimal interval for the research variables, the type of model is determined in terms of linearity or non-linearity. For this purpose, the F test statistic was used. In the following, the appropriate transfer variable should be selected for the nonlinear model. To select the transition variable, any potential explanatory variable can be tested, but priority is given to the transition variable that rejects the null hypothesis of the f-test more strongly. Before estimation, model parameters using Newton-Raphsen algorithm are first checked for the existence or non-existence of collinearity between the variables of the model using the collinearity test of the variance inflation factor (Vif). In the following, the mentioned models are estimated and an attempt is made to analyze the models in which the variables have the greatest impact on the monetary policy maker and Taylor's principle is observed in them.
Results: The results showed that, firstly, the reaction function of monetary policy makers in 16 selected countries is non-linear. Secondly; The findings from the estimation of the specified policy rule based on models (1), (2), (3) and (4) have shown that in all the investigated countries, by entering the variables of oil price changes and the official exchange rate into Taylor's model (model 1), the targeting of monetary policy makers is stable. Meanwhile, for the country of Iran, with the inclusion of the variables of oil price changes and official exchange rate in the Taylor model, inflation targeting is changed to production targeting. Thirdly; Based on the results obtained from the estimation of models, it can be seen that the variable of oil price changes in the countries of Algeria, Qatar, Kazakhstan, Ecuador, Colombia, Malaysia, Mexico, Belarus and Bulgaria affects the reaction function of monetary policy makers through the production gap channel and in Iran, Russia, Angola, Nigeria, Brazil, Tunisia and Azerbaijan through the official exchange rate gap channel.
Conclusion: It is suggested that the central banks of the countries use key and influential variables such as: changes in oil prices, stock prices, housing prices, exchange rates, etc., because the selection of inappropriate policy goals damages the credibility of the central bank and invalidates the targeting framework.

Keywords

Main Subjects

References

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  • Receive Date: 29 November 2022
  • Revise Date: 25 February 2023
  • Accept Date: 01 March 2023

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