Is monetary policy non‐linear in Indonesia, Korea, Malaysia, and Thailand? A quantile regression analysis

There is a growing literature on the linearity or otherwise of monetary policy in industrialised countries. The investigations have revealed that the reactions of central banks to economic variables depend on the level of the variables, confirming the non‐linearity of monetary policy in these countries. However, research into whether monetary policy is non‐linear in emerging markets has been hampered by the lack of data, as a stable, ‘modern’ monetary regime has existed in emerging markets for only a relatively short time. Employing quantile regression, which is not as constrained as other regression methods by the shortness of time series, we investigate the non‐linearity of monetary policy in four emerging Asian nations: Indonesia, Korea, Malaysia, and Thailand. Our results indicate that monetary policy in all four is non‐linear. All display a ‘hump‐shaped’ response to inflation across the quantiles—policy becomes tighter, going from lower to higher quantiles, reaches a peak, and then becomes looser. These results are similar to those found previously in Japan, and likely arise from a desire to limit exchange rate appreciation, as all four countries depend heavily on exports.