Empirics of Monetary Policy Rules: The Taylor Rule in Different Countries

This study examines how monetary policy rules apply in different countries. Empirical evidence shows that the Taylor rule parameters are positive in most specifications in most countries. This is consistent with the notion that monetary policy responds in a similar direction to both growth and inflation. Individual country regressions generate average inflation coefficients (the response of policy rates to a percentage-point rise in inflation) that range between 0.2 and 0.6. The response of monetary policy to inflation, therefore, is not generally more than one-for-one, indicating that the Taylor principle is not satisfied for most of the economies under study. Panel data regressions confirm the observation that the inflation coefficient is positive. It is, however, ambiguous whether the Taylor principle holds since panel regressions indicate that the inflation coefficients may be less than or greater than one. The study extends the analysis by exploiting the observed variation in responsiveness of monetary policy to inflation. Cross-country regressions show that central bank independence, trade openness and exchange rate flexibility contribute to the variation in responsiveness to inflation. The effect of debt and size of government, however, is ambiguous.