Essays on Monetary Policy Rules and Inflation Dynamics

Download or read book Essays on Monetary Policy Rules and Inflation Dynamics written by Saad Ahmad and published by . This book was released on 2016 with total page 264 pages. Available in PDF, EPUB and Kindle. Book excerpt: There has been a growing trend to utilize nonlinear models to analyze key issues in monetary policy and international macroeconomics. Using traditional linear models to understand nonlinear relationships can often lead to inaccurate inference and erroneous policy recommendations. The three essays in this dissertation explore nonlinearity in the Federal Reserve’s policy response as well as between a country’s inflation dynamics and integration in the global economy. My aim in accounting for potential nonlinearity is to get a better understanding of the policy makers’ opportunistic approach to monetary policy and evaluate the inflation globalization hypothesis, which basically predicts that global factors will eventually replace the domestic determinants of inflation. In the first essay I develop abroad nonlinear Taylor rule framework, in conjunction with real time data, to examine the Fed’s policy response during the Great Moderation. My flexible framework is also able to convincingly show that the Fed departed from the Taylor rule during key periods in the Great Moderation as well as in the recent financial crisis. The second essay uses a threshold methodology to investigate the importance of nonlinear effects in the analysis of the inflation globalization hypothesis. Finally the third essay investigates the relationship between inflation and globalization, under an open-economy Phillips Curve framework, for a panel of OECD countries with a dynamic panel GMM methodology. Contrary to most of the previous literature, which ignores such nonlinearities, my new approach provides some interesting empirical evidence supportive of the effect globalization has on a country’s inflation dynamics.