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Estimating the discount rate policy reaction function of the monetary authority
Author(s) -
Choi Woon Gyu
Publication year - 1999
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/(sici)1099-1255(199907/08)14:4<379::aid-jae516>3.0.co;2-2
Subject(s) - economics , monetary policy , tobit model , inflation (cosmology) , econometrics , consistency (knowledge bases) , sign (mathematics) , time consistency , function (biology) , estimation , stochastic discount factor , interest rate , monetary economics , actuarial science , mathematics , mathematical analysis , physics , geometry , management , capital asset pricing model , evolutionary biology , theoretical physics , biology
This paper estimates a policy rule that explains the sign and the magnitude of the Federal Reserve's (Fed's) discount rate changes. It sets out a two‐sided Type II Tobit model and develops a procedure for its estimation, considering the discrete and censored nature of the changes. The results suggest that the Fed has conducted discount rate policy counter‐cyclically to influence output and to curb inflation, and that the Fed's response to policy indicators varies over monetary regimes. Furthermore, consistency is found between the model prediction of the discount rate change and a classification based on whether the change is technical or non‐technical. Copyright © 1999 John Wiley & Sons, Ltd.