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Nonlinear monetary policy reaction functions in large emerging economies: the case of Brazil and China

Jawadi, Fredj, Mallick, Sushanta Kumar and Sousa, Ricardo J. (2014) Nonlinear monetary policy reaction functions in large emerging economies: the case of Brazil and China. Applied Economics, 46 (9). pp. 973-984. ISSN 0003-6846

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Identification Number: 10.1080/00036846.2013.851774


This article estimates monetary policy rules for two key emerging market economies: Brazil and China. It analyses whether the monetary authority reacts to changes in economic activity, financial markets, monetary conditions, the foreign exchange market and the commodity price. We assess the importance of nonlinearity using a smooth transition regression (STR) model. Using quarterly data over the time period 1990:1 to 2008:4, we find that considerations about the output gap and the real effective exchange rate (in the case of Brazil), and the inflation rate (for China) explain the nonlinear adjustment of the central bank rate. Moreover, the results suggest that central banks pursue a target range for the threshold variable rather than a specific point target. In the case of China, the McCallum rule shows that the GDP growth, the interest rate and the commodity price drive the response of the growth rate of the relevant monetary aggregate.

Item Type: Article
Official URL:
Additional Information: © 2013 Routledge, Taylor and Francis Group
Divisions: Economics
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HD Industries. Land use. Labor > HD2329 Industrialization
H Social Sciences > HJ Public Finance
JEL classification: C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C22 - Time-Series Models
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
Date Deposited: 28 Feb 2014 10:40
Last Modified: 20 Oct 2021 00:48

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