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Essays in asymmetric monetary policy preferences

Hu, Congyi 2018. Essays in asymmetric monetary policy preferences. PhD Thesis, Cardiff University.
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Abstract

This thesis investigates the open economy policy rule under the assumption of asymmetries in monetary policy preference, and how such asymmetric monetary policy preference can contribute to the exchange rate forecasting literature. The first chapter estimates an open economy monetary policy rule for the Bank of England and assesses its policy preference in the era of inflation targeting. The reduced-form estimates of the central bank policy function suggest that the preferences for the Bank of England can be characterised as asymmetries during the inflation targeting period, with the interest rate responses to the downside of the economy being larger than the response to the upside of the economy of the same magnitude. However, these results are not robust when we include the unconventional monetary policy period. The second chapter extends the standard Taylor rule fundamentals of the exchange rate by incorporating the asymmetric monetary preferences. We present an exchange rate forecasting model (augmented Taylor rule fundamentals) under a credible inflation-targeting regime, in which the exchange rate could have asymmetric responses to the level of inflation and output gap. Our empirical results indicate the importance of asymmetric exchange rate response for modelling the exchange rate movement. In particular, the augmented Taylor rule fundamentals can provide more robust short-term exchange rate predictability than the standard Taylor rule fundamental during the conventional monetary policy period.

Item Type: Thesis (PhD)
Date Type: Completion
Status: Unpublished
Schools: Business (Including Economics)
Uncontrolled Keywords: Taylor rule, Asymmetric preferences, Exchange rate, Inflation announcements, Nonlinear monetary policy rules, Central banks, Inflation targeting, Open economy, Out-of-sample predictability, GMM
Date of First Compliant Deposit: 30 May 2019
Date of Acceptance: 29 May 2019
Last Modified: 30 May 2019 15:33
URI: http://orca-mwe.cf.ac.uk/id/eprint/123002

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