Monetary policy reaction function and external economic uncertainty: evidence from 30 selected countries

Pei-Tha Gan,Fatimah Salwa Binti Abd Hadi,Kok-Jing Yee,Norasibah Binti Abdul Jalil

doi:10.5267/j.msl.2019.4.020

Abstract

Monetary policy reaction function and external economic uncertainty: evidence from 30 selected countries

Highlights

Exchange rate and terms of trade (TOT)1 can be significant in the monetary policy decision making
The findings suggest that (i) the interest rate can serve as an important instrument for the central bank policy decision making to combat the economic uncertainty arising from output, inflation, exchange rate and terms of trade (TOT), and (ii) the economic uncertainty can serve as a useful information for monetary policy action to avoid and/or mitigate a negative impact of uncertainty
Because a reduce in TOT can cause a negative impact on output gap and inflation that eventually lead to a sluggish future economic growth, the TOT cannot be ignored in the monetary policy decision making (Fatima, 2010)

Summary

Introduction

Exchange rate and terms of trade (TOT) can be significant in the monetary policy decision making. Because a reduce in TOT can cause a negative impact on output gap and inflation that eventually lead to a sluggish future economic growth, the TOT cannot be ignored in the monetary policy decision making (Fatima, 2010). Salunkhe and Patnaik (2017) use Granger causality test and structural vector autoregression to examine the relationship between interest rate and, output gap and inflation. Their finding concludes that output gap has a greater impact rather than inflation. It seems natural to examine external economic uncertainty that can improve the effectiveness of monetary policy

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Methods

Results

Conclusion