Monetary policy reaction function and external economic uncertainty: evidence from 30 selected countries

Gan, Pei-Tha

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Type :	article
Subject :	HB Economic Theory
Main Author :	Gan, Pei-Tha
Additional Authors :	Kok, Yee-Jing Fatimah Salwa Abd. Hadi Norasibah Abdul Jalil
Title :	Monetary policy reaction function and external economic uncertainty: evidence from 30 selected countries

Place of Production :	Tanjong Malim
Publisher :	Fakulti Pengurusan dan Ekonomi
Year of Publication :	2019
Corporate Name :	Universiti Pendidikan Sultan Idris
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Abstract : Universiti Pendidikan Sultan Idris

A noteworthy feature in the monetary policy decision making is that interest rate can play a significant role in addressing economic uncertainty. Although the empirical studies on monetary policy reaction function routinely include the output gap and the inflation, not many studies take into account the exchange rate uncertainty and terms of trade uncertainty. To overcome this shortcoming, this paper examines the monetary policy reaction function by including the external economic uncertainty. Based on 30 selected countries, the estimation is relaxed by using the panel heterogeneous cointegration technique. The findings suggest that (i) the interest rate can serve as an important instrument for the central bank policy decision making to combat the economic uncertainty arising from output, inflation, exchange rate and terms of trade (TOT), and (ii) the economic uncertainty (i.e., output uncertainty, inflation uncertainty, exchange rate uncertainty and TOT uncertainty) can serve as a useful information for monetary policy action to avoid and/or mitigate a negative impact of uncertainty.

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