Nonlinear Monetary Policy Rules: An Essay in the Comparative Study on Egyptian and Tunisian Central Banks

Yosra Baaziz,Moez Labidi

doi:10.3390/economies4020006

Abstract

The purpose of this paper is to evaluate the behavior of monetary authorities in Tunisia and Egypt, in response to changes in macroeconomic variables over time based on LSTR model. In this sense, we estimate Taylor-type equations for short-term interest rate in Tunisia and Egypt using quarterly data covering the period 1998.Q4–2013.Q2. We find strong evidence that the real decision-making process followed by these central banks varies from one central bank to another and that it exhibits nonlinear patterns that better capture special events and unexpected contingencies i.e., the terrorist attack in the US in September 2001, the global financial crisis in 2008, and the effect of political instability with the onset of the revolution. Additionally, the presence of asymmetries in the reaction function of the Tunisian and Egyptian Bank requires disconnection from their automatic pilot rules and use of judgement to make decisions.

Highlights

Empirical studies have investigated optimal monetary policy or monetary policy rule under the assumption that central banks handle interest rate setting in a linear manner
The aim of this paper is to investigate more in-depth the possible presences of nonlinear dynamics using the Smooth Transition Regression (STR) methodology advocated by Granger and Terasvirta (1993) [17]
This means that when the interest rate falls below the threshold value of 4.708%, monetary policy enters the liquidity trap regime where the policy instrument does not respond in the usual way to its determinants

Summary

Introduction

The theoretical underpinning of this linear policy rule is the linear-quadratic (LQ) framework, stemming from the combination of a linear economic structure and a symmetric objective preferences of the policymaker. This combination leads to a linear reaction function. Some researchers include a lagged value of interest rate as an additional explanatory variable in the monetary policy. This process called “inertia” or “gradualism” tends to move policy rate in a series of small a moderate steps (Clarida et al, 1998) [2]

Objectives

Methods

Results

Conclusion