Abstract
This article aims to examine the monetary policy rule under an inflation targeting in Mongolia with a focus on its conformity to the Taylor principle, through two kinds of approaches: a monetary policy reaction function by the generalized-method-of-moments (GMM) estimation and a New Keynesian dynamic stochastic general equilibrium (DSGE) model with a small open economy version by the Bayesian estimation. The main findings are summarized as follows. First, the GMM estimation identified an inflation-responsive rule fulfilling the Taylor principle in the recent phase of the Mongolian inflation targeting. Second, the DSGE-model estimation endorsed the GMM estimation by producing a consistent outcome on the Mongolian monetary policy rule. Third, the Mongolian rule was estimated to have a weaker response to inflation than the rules of the other emerging Asian adopters of an inflation targeting.
Highlights
Mongolia has evolved her monetary policy framework, since she transformed the economic system from a centrally planned economy to a market-based economy in the early 1990s
This article aims to examine the monetary policy rule under an inflation targeting in Mongolia with a focus on its conformity to the Taylor principle, through the two kinds of models: a monetary policy reaction function by the generalized-method-of-moments (GMM) estimation and a New Keynesian dynamic stochastic general equilibrium (DSGE) model by the Bayesian estimation
This study examines Mongolian monetary policy rule in a DSGE macroeconomic framework as well as in a single policy reaction function with the GMM estimation, so that the Taylor principle could be identified in a robust manner
Summary
Mongolia has evolved her monetary policy framework, since she transformed the economic system from a centrally planned economy to a market-based economy in the early 1990s. For developing and emerging-market economies like Mongolia, the validity of the Taylor principle is questionable and has been limitedly studied, even though the economies adopted an inflation targeting in their monetary policy frameworks. Another point worth noting in analyzing monetary policy rules in developing and emerging-market economies is that their rules are often supposed to take into account inflation and output gap and exchange rate fluctuations. This study examines Mongolian monetary policy rule in a DSGE macroeconomic framework as well as in a single policy reaction function with the GMM estimation, so that the Taylor principle could be identified in a robust manner.
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