Abstract
The aim of this study is to determine if capital flows can account for the international effects on domestic monetary policy, using an augmented Taylor rule model. In addition to the standard determinants of nominal interest rates, we include capital flow measures to show how central banks consider this important factor when deciding on the most appropriate monetary policy. Using a panel of inflation targeting economies and the dynamic panel approach, this study finds that capital inflows and outflows are an important determinant of nominal interest rates.
Highlights
The aim of this study is to determine whether capital flows are an important factor in deciding the nominal interest rate in a sample of inflation targeting countries
There are a limited number of papers that discuss the influence of international linkages in the rule, one that considers capital flow dynamics directly in the model
Even though the UK monetary policy rule had changed during the crisis, empirical estimations could not capture the reasons for the changes, as it will call for joint estimations and examination on the relationship of the aggregate demand and supply
Summary
The aim of this study is to determine whether capital flows are an important factor in deciding the nominal interest rate in a sample of inflation targeting countries. Taylor (1993) set a representative policy rule for the US economy based on the economic conditions at that time, by applying a certain weight to the price level and real output, even though there was no specific consensus established on the parameter size in the rule. This rule has become a popular assessment approach for modelling the monetary policy stance of the central banks both in the advanced and emerging economies
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