Besides the introduction and conclusion, this thesis is comprised of six independent chapters. In this thesis we provide an in-sample and out-of-sample assessment of how the South African Reserve Bank (SARB) sets its policy rate, post 2000 inflation targeting regime, in the context of both linear and nonlinear Taylor-type rule models of monetary policy.<p. Chapter 2 provides the theoretical foundations and the case study discussion. The literature has shown that the Taylor (1993) rule has gone through many modifications since the last decade of the 20th century. The modifications of the Taylor rule include interest rate smoothing, backward and forward looking versions, and nonlinear approximations. Furthermore, there has been increasing debate on whether central banks should respond to asset prices and financial variables. Despite some disagreements, economists seem to agree on the role of the financial market in determining inflation and economic performance. As far as South Africa is concerned, a stable financial system is one of the mandates of the central bank. Chapter 3 discusses the research methods used in the thesis. First, the chapter provides an overview on the Hodrick-Prescott Filter used to detrend some series. Second, more focus is oriented on a class of estimators, used in this thesis, called Generalized Method of Moments (GMM) estimators. GMM is important in that it can be applied to several estimation contexts besides the linear model. In fact, GMM can provide a simple alternative to other estimators, especially when it is difficult to write down the maximum likelihood estimator. Chapter 4 is aimed to provide the source of data, to show the transformation made to some of them and to explore the data for preliminary results. The Augmented Dickey- Fuller (ADF), Phillips-Perron (PP), GLS transformed Dickey-Fuller (DFGLS) and Kwiatkowski, et. Al. (KPSS) tests suggest that all the series follow a stationary process. The chapter also reveals that the financial conditions index measured as an equal weight average of its components yields a smallest AIC than other alternative suggested herein. Furthermore, the chapter shows that the models that consider coincident business cycle indicator, rather than industrial production, perform better in terms of goodness of fit. Given the controversial debate on whether central banks should target asset prices for economic stability, chapter 5 investigates whether the SARB pays close attention to asset and financial markets in their policy decisions. The main findings are that the SARB policy-makers pay close attention to the financial conditions index when setting interest rate. In the same chapter, it is also found that nonlinear Taylor rule improves its performance with the advent of the financial crisis, providing the best description of insample SARB interest rate setting behaviour. The 2007-2009 financial crisis witnesses an overall increased reaction to inflation and financial conditions. In addition, the financial crisis saw a shift from output stabilisation to inflation targeting and a shift, from a symmetric policy response to financial conditions, to a more asymmetric response depending on the state of the economy. Although one could have expected that the SARB’s response of monetary policy to output during the crisis to increase, the response has dropped significantly. These results show the concern over the high level of inflation observed during the second semester of 2008.<p. In chapter 6, we test the concept of Opportunistic Approach to monetary policy. The findings support the two features of the opportunistic approach. First, we find that the models that include an intermediate target that reflects the recent history of inflation rather than a simple inflation target improve the fit of the models. Second, the data supports the view that the South African Reserve Bank (SARB) behaves with some degree of non-responsiveness when inflation is within the zone of discretion but react aggressively otherwise. Recursive estimates from the preferred model reveal that overall there has been a subdued reaction to inflation, output and financial conditions amidst the increased economic uncertainty of the 2007-2009 financial crisis. Chapter 7 compares forecast performance of linear and nonlinear monetary policy rules estimated in the two previous chapters but rewritten in their backward looking versions. Recursive forecasts values are computed for 1- to 12-step ahead for the out-of-sample period 2006:01 to 2010:12. For the nonlinear models we use bootstrap method for multi-step ahead forecasts as opposed to point forecasts approach used for linear models. The aim is to evaluate the performance of three competing models in an out of-sample forecasting exercise. Overall ranking reveals the superiority of the nonlinear model that distinguishes between downward and upward movements in the business cycles in closely matching the historical record. As such, forecasting performance tests reveal that the SARB pays particular attention to business cycles movements when setting its policy rate. / Thesis (PhD)--University of Pretoria, 2011. / Economics / unrestricted

In this dissertation three different economic issues have been analyzed. The first issue is whether monetary policy rules can improve forecasting accuracy of inflation. The second is whether the preference of a central bank is symmetry or not. The last issue is whether the behavior of aggregate dividends is asymmetry. Each issue is considered in Chapter II, III and IV, respectively. The linkage between monetary policy rules and the prediction of inflation is explored in Chapter II. Our analysis finds that the prediction performance of the term structure model hinges on monetary policy rules, which involve the manipulation of the federal funds rate in response to the change in the price level. As the Fed's reaction to inflation becomes stronger, the predictive information contained in the term structure becomes weaker. Using the long-run Taylor rule, a new assessment of the prediction performance regarding future change in inflation is provided. The empirical results indicate that the long-run Taylor rule improves forecasting accuracy. In chapter III, the asymmetric preferences of the central bank of Korea are examined under New Keynesian sticky prices forward-looking economy framework. To this end, this chapter adopts the central bank's objective functional form as a linear-exponential function instead of the standard quadratic function. The monetary policy reaction function is derived and then asymmetric preference parameters are estimated during the inflation targeting period: 1998:9-2005:12. The empirical evidence supports that while the objective of output stability is symmetry, but the objective of price stability is not symmetry. Specifically, it appears that the central bank of Korea aggressively responds to positive inflation gaps compared to negative inflation gaps. Chapter IV examines the nonlinear dividend behavior of the aggregate stock market. We propose a nonlinear dividend model that assumes managers minimize the regime dependent adjustment costs associated with being away from their target dividend payout. By using the threshold vector error correction model, we find significant evidence of a threshold effect in aggregate dividends of S&P 500 Index in quarterly data when real stock prices are used for the target. We also find that when dividends are relatively higher than target, the adjustment cost of dividends is much smaller than that when they are lower.

Magister Commercii - MCom / Monetary policy rules are guidelines applied by policy makers when adjusting monetary instruments towards reaching policy objectives like price stability. The South African Reserve Bank (SARB) uses the repurchase (repo) rate at which it lends to commercial banks as its monetary instrument. This study examines whether the SARB considers the output gap when deciding on changes to the repo rate. In order to test the above hypothesis the study applied a simple multiple linear regression model (quantitative methods). The hypothesis was tested based on the following independent variables: consumer price index (headline), natural real interest rate, potential output and actual output using the Eviews and STAMP econometric software packages. The study focussed on the time period between 1989 and 2009 when the central bank governors were targeting the repo rate as an instrument towards achieving their monetary policy objectives. The results illustrate evidence of 82 % to 92 % correlation in the movements between the predicted Taylor rule with the univariate model and the actual repo rate. This means that the behaviour the SARB monetary policy conduct was sufficiently structured and influenced by the developments of both inflation and the output gap, even though the SARB have not consciously implemented a Taylor model. In short, the output gap and inflation rate gap pressures influenced strongly the monetary policy decisions of the SARB, even before the formal adoption of an inflation targeting framework.

In Korea, an inflation targeting (IT) regime was adopted in the aftermath of the Korean currency crisis of 1997–1998. At that time, the Bank of Korea (BOK) shifted the instrument of monetary policy from monetary aggregates to interest rates. Recently, central bank policymakers have confronted more uncertainties than ever before when deciding their policy interest rates. In this monetary policy environment, it is worth exploring whether the BOK has kept a conservative posture in moving the Korean call rate target, the equivalent of the US Federal Funds rate target since the implementation of an interest rate-oriented monetary policy. Together with this, the global financial crisis (GFC) of 2007–2009 provoked by the US sub-prime mortgage market recalls the following question: should central banks pre-emptively react to a sharp increase in asset prices? Historical episodes indicate that boom-bust cycles in asset prices, in particular, house prices, can be damaging to the economy. In Korea, house prices have been evolving under uncertainties, and in the process house-price bubbles have been formed. Therefore, in recent years, central bankers and academia in Korea have paid great attention to fluctuations in asset prices. In this context, the aims of this thesis are: (i) to set up theoretical and empirical models of monetary policy under uncertainty; (ii) to examine the effect of uncertainty on the operation of monetary policy since the adoption of interest rate-oriented policy; and (iii) to investigate whether gradual adjustment in policy rates can be explained by uncertainty in Korea. Another important aim is (iv) to examine whether house-price fluctuations be taken into account in formulating monetary policy. The main findings of this thesis are summarised as follows. Firstly, as in advanced countries, the four stylised facts regarding the policy interest rate path are found in Korea: infrequent changes in policy rates; successive changes in the same direction; asymmetric adjustments in terms of the size of interest-rate changes for continuation and reversal periods; and a long pause before reversals in policy rates. These patterns of policy rates (i.e., interest-rate smoothing) characterised the central bank‘s reaction to inflation and the output gap as being less aggressive than the optimising central bank behavior would predict (Chapter 3). Secondly, uncertainty may provide a rationale for a smoother path of the policy interest rate in Korea. In particular, since the introduction of the interest rate-oriented monetary policy, the actual call money rates have shown to be similar to the optimal rate path under parameter uncertainty. Gradual movements in the policy rates do not necessarily indicate that the central bank has an interest-rate smoothing incentive. Uncertainty about the dynamic structure of the economy, which is dubbed ‗parameter uncertainty‘, could account for a considerable portion of the observed gradual movements in policy interest rates (Chapter 4). Thirdly, it is found that the greater the output-gap uncertainty, the smaller the output-gap response coefficients in the optimal policy rules, and in a similar vein, the greater inflation uncertainty, the smaller the inflation response coefficients. The optimal policy rules derived by using data without errors showed the large size of the output-gap and inflation response coefficients. This finding confirms that data uncertainty can be one of sources explaining the reasons why monetary policymakers react less aggressively in setting their interest rate instrument (Chapter 5). Finally, we found that house prices conveyed some useful information on conditions such as possible financial instability and future inflation in Korea, and the house-price shock differed from other shocks to the macroeconomy in that it had persistent impacts on the economy, consequently provoking much larger economic volatility. Empirical simulations showed that the central bank could reduce its loss values in terms of economic volatility, resulting in promoting overall economic stability when it responds more directly to fluctuations in house prices. This finding provides the reason why the central bank should give more attention to house-price fluctuations when conducting monetary policy (Chapter 6).

A presente tese é constituída de três ensaios que abordam duas relevantes questões que estão intrinsecamente relacionadas em macroeconomia: política monetária e inflação. No primeiro ensaio, nós procuramos averiguar não linearidades na função de reação do Banco Central do Brasil (BCB) através da estimação de regressões quantílicas inversa, sugerido por Wolters (2012) e proposto por Chernozhukov and Hansen (2005, 2006). Este método nos possibilitou detectar não linearidades na função de reação do BCB sem a necessidade de fazer suposições específicas acerca dos fatores que determinam essas não linearidades. Em específico, nós observamos que: i) a resposta da taxa de juros ao hiato da inflação corrente e esperada foi, em geral, mais forte na parte superior da distribuição condicional da taxa de juros Selic; ii) a resposta ao hiato do produto apresentou uma tendência crescente e significativa na parte inferior da distribuição condicional da taxa Selic; iii) a resposta do BCB à taxa de câmbio real foi positiva e mais elevada na cauda superior da distribuição condicional da taxa Selic. No segundo ensaio, nós investigamos a existência de não linearidades na função de reação do Banco Central do Brasil (BCB) decorrentes de incertezas desse policymaker acerca dos efeitos do hiato do produto sobre a inflação. Teoricamente, nós seguimos Tillmann (2011) para obter uma regra de política monetária ótima não linear que é robusta às incertezas acerca do trade-off produto-inflação na curva de Phillips. Além disso, nós realizamos testes de quebra estrutural para avaliar possíveis mudanças na condução da política monetária brasileira durante o regime de metas de inflação. Os resultados indicaram que: i) as incertezas acerca da inclinação na curva Phillips implicaram em não linearidades na função de reação do BCB; ii) não se pode rejeitar a hipótese de uma quebra estrutural nos parâmetros da regra monetária ocorrendo no terceiro trimestre de 2003; iii) houve um aumento na resposta da taxa Selic ao hiato do produto e uma redução da reação ao hiato da inflação corrente no regime Meirelles- Tombini; e iv) o BCB também tem reagido à taxa de câmbio durante o regime Meirelles- Tombini. No terceiro ensaio, nós procuramos analisar os determinantes da inflação no Brasil através da estimação da Curva de Phillips Novo-Keynesiana (CPNK) proposta por Blanchard e Galí (2007) e a versão padrão proposta por Galí e Gertler (1999). Além disso, realizamos testes de quebras estruturais para avaliar possíveis mudanças na dinâmica da inflação brasileira durante o período de 2002 a 2014. Os resultados indicaram que: i) os testes de quebra estrutural apontam a existência de pelo menos uma mudança estrutural nos coeficientes da CPNK; ii) o componente forward-looking da inflação é dominante, embora sua relevância tenha sido reduzida após 2004; iii) a taxa de desemprego tem afetado negativamente a inflação, embora seja observado uma redução desse impacto nos últimos anos; iv) as mudanças na taxa de câmbio apenas tiveram efeitos sobre a inflação na primeira subamostra e tem perdido relevância no período mais recente; v) o efeito do hiato do produto sobre a inflação corrente diminuiu nos anos recentes; vi) em geral, nós rejeitamos a hipótese nula de uma curva de Phillips vertical no longo prazo a um nível de significância de 5%, mas não a 1%. / This thesis is composed of three essays to address two important issues that are intricately related in macroeconomics: monetary policy and inflation. In the first essay, we seek to investigate nonlinearities in the reaction function of the Central Bank of Brazil (CBB) by estimating inverse quantile regressions (IVQR), suggested by Wolters (2012) and proposed by Chernozhukov and Hansen (2005, 2006). This method enabled us to detect nonlinearities in the CBB’s reaction function without the need to make specific assumptions about the factors that determine these nonlinearities. In particular, we observed that: i) the response of the interest rate to the current and expected inflation was, in general, stronger in the upper tail of the conditional interest rate distribution; ii) the response to the output gap showed a growing and significant trend in the lower tail of the conditional Selic rate distribution; iii) the response of the CBB to the real exchange rate was positive and higher in the upper tail of the conditional Selic rate distribution. In the second essay, we investigate the existence of nonlinearities in the reaction function of the Central Bank of Brazil (CBB) arising from this policymaker’s uncertainties about the effects of the output gap on inflation. Theoretically, we follow Tillmann (2011) to obtain a nonlinear optimal monetary policy rule that is robust to uncertainty about the output-inflation trade-off of the Phillips Curve In addition, we perform structural break tests to assess possible changes in the conduct of the Brazilian monetary policy during the inflation-targeting regime. The results indicate that: i) the uncertainties about the slope in the Phillips curve implied nonlinearities in the CBB’s reaction function; ii) we cannot reject the hypothesis of a structural break in the monetary rule parameters occurring in the third quarter of 2003; iii) there was an increase in the response of the Selic rate to output gap and a weaker response to the current inflation gap in Meirelles Tombini’s administration; and iv) the CBB has also reacted to the exchange rate in Meirelles-Tombini’s administration. In the third essay, we proposed to analyze the determinants of inflation in Brazil through the estimation of the new Keynesian Phillips curve (NKPC) proposed by Blanchard and Galí (2007) and the standard version proposed by Galí and Gertler (1999). In addition, we perform structural break tests to assess possible changes in the dynamics of inflation in Brazil during the period 2002 to 2014. The results indicated that: i) structural break tests indicate the existence of at least one structural change in the coefficients of NKPC ; ii) the forward-looking component of inflation is dominant, though its importance has been reduced after 2004; iii) the unemployment rate has negatively affected inflation, although a reduction of this impact has been observed in recent years; iv) changes in the rate of exchange only had effects on inflation in the first subsample and losing relevance in the most recent period; v) the effect of the output gap on the current inflation has declined in recent years; vi) overall, we reject the null hypothesis of a vertical Phillips curve in the long term at a significance level of 5%, but not 1%.

A presente tese é constituída de três ensaios que abordam duas relevantes questões que estão intrinsecamente relacionadas em macroeconomia: política monetária e inflação. No primeiro ensaio, nós procuramos averiguar não linearidades na função de reação do Banco Central do Brasil (BCB) através da estimação de regressões quantílicas inversa, sugerido por Wolters (2012) e proposto por Chernozhukov and Hansen (2005, 2006). Este método nos possibilitou detectar não linearidades na função de reação do BCB sem a necessidade de fazer suposições específicas acerca dos fatores que determinam essas não linearidades. Em específico, nós observamos que: i) a resposta da taxa de juros ao hiato da inflação corrente e esperada foi, em geral, mais forte na parte superior da distribuição condicional da taxa de juros Selic; ii) a resposta ao hiato do produto apresentou uma tendência crescente e significativa na parte inferior da distribuição condicional da taxa Selic; iii) a resposta do BCB à taxa de câmbio real foi positiva e mais elevada na cauda superior da distribuição condicional da taxa Selic. No segundo ensaio, nós investigamos a existência de não linearidades na função de reação do Banco Central do Brasil (BCB) decorrentes de incertezas desse policymaker acerca dos efeitos do hiato do produto sobre a inflação. Teoricamente, nós seguimos Tillmann (2011) para obter uma regra de política monetária ótima não linear que é robusta às incertezas acerca do trade-off produto-inflação na curva de Phillips. Além disso, nós realizamos testes de quebra estrutural para avaliar possíveis mudanças na condução da política monetária brasileira durante o regime de metas de inflação. Os resultados indicaram que: i) as incertezas acerca da inclinação na curva Phillips implicaram em não linearidades na função de reação do BCB; ii) não se pode rejeitar a hipótese de uma quebra estrutural nos parâmetros da regra monetária ocorrendo no terceiro trimestre de 2003; iii) houve um aumento na resposta da taxa Selic ao hiato do produto e uma redução da reação ao hiato da inflação corrente no regime Meirelles- Tombini; e iv) o BCB também tem reagido à taxa de câmbio durante o regime Meirelles- Tombini. No terceiro ensaio, nós procuramos analisar os determinantes da inflação no Brasil através da estimação da Curva de Phillips Novo-Keynesiana (CPNK) proposta por Blanchard e Galí (2007) e a versão padrão proposta por Galí e Gertler (1999). Além disso, realizamos testes de quebras estruturais para avaliar possíveis mudanças na dinâmica da inflação brasileira durante o período de 2002 a 2014. Os resultados indicaram que: i) os testes de quebra estrutural apontam a existência de pelo menos uma mudança estrutural nos coeficientes da CPNK; ii) o componente forward-looking da inflação é dominante, embora sua relevância tenha sido reduzida após 2004; iii) a taxa de desemprego tem afetado negativamente a inflação, embora seja observado uma redução desse impacto nos últimos anos; iv) as mudanças na taxa de câmbio apenas tiveram efeitos sobre a inflação na primeira subamostra e tem perdido relevância no período mais recente; v) o efeito do hiato do produto sobre a inflação corrente diminuiu nos anos recentes; vi) em geral, nós rejeitamos a hipótese nula de uma curva de Phillips vertical no longo prazo a um nível de significância de 5%, mas não a 1%. / This thesis is composed of three essays to address two important issues that are intricately related in macroeconomics: monetary policy and inflation. In the first essay, we seek to investigate nonlinearities in the reaction function of the Central Bank of Brazil (CBB) by estimating inverse quantile regressions (IVQR), suggested by Wolters (2012) and proposed by Chernozhukov and Hansen (2005, 2006). This method enabled us to detect nonlinearities in the CBB’s reaction function without the need to make specific assumptions about the factors that determine these nonlinearities. In particular, we observed that: i) the response of the interest rate to the current and expected inflation was, in general, stronger in the upper tail of the conditional interest rate distribution; ii) the response to the output gap showed a growing and significant trend in the lower tail of the conditional Selic rate distribution; iii) the response of the CBB to the real exchange rate was positive and higher in the upper tail of the conditional Selic rate distribution. In the second essay, we investigate the existence of nonlinearities in the reaction function of the Central Bank of Brazil (CBB) arising from this policymaker’s uncertainties about the effects of the output gap on inflation. Theoretically, we follow Tillmann (2011) to obtain a nonlinear optimal monetary policy rule that is robust to uncertainty about the output-inflation trade-off of the Phillips Curve In addition, we perform structural break tests to assess possible changes in the conduct of the Brazilian monetary policy during the inflation-targeting regime. The results indicate that: i) the uncertainties about the slope in the Phillips curve implied nonlinearities in the CBB’s reaction function; ii) we cannot reject the hypothesis of a structural break in the monetary rule parameters occurring in the third quarter of 2003; iii) there was an increase in the response of the Selic rate to output gap and a weaker response to the current inflation gap in Meirelles Tombini’s administration; and iv) the CBB has also reacted to the exchange rate in Meirelles-Tombini’s administration. In the third essay, we proposed to analyze the determinants of inflation in Brazil through the estimation of the new Keynesian Phillips curve (NKPC) proposed by Blanchard and Galí (2007) and the standard version proposed by Galí and Gertler (1999). In addition, we perform structural break tests to assess possible changes in the dynamics of inflation in Brazil during the period 2002 to 2014. The results indicated that: i) structural break tests indicate the existence of at least one structural change in the coefficients of NKPC ; ii) the forward-looking component of inflation is dominant, though its importance has been reduced after 2004; iii) the unemployment rate has negatively affected inflation, although a reduction of this impact has been observed in recent years; iv) changes in the rate of exchange only had effects on inflation in the first subsample and losing relevance in the most recent period; v) the effect of the output gap on the current inflation has declined in recent years; vi) overall, we reject the null hypothesis of a vertical Phillips curve in the long term at a significance level of 5%, but not 1%.

A presente tese é constituída de três ensaios que abordam duas relevantes questões que estão intrinsecamente relacionadas em macroeconomia: política monetária e inflação. No primeiro ensaio, nós procuramos averiguar não linearidades na função de reação do Banco Central do Brasil (BCB) através da estimação de regressões quantílicas inversa, sugerido por Wolters (2012) e proposto por Chernozhukov and Hansen (2005, 2006). Este método nos possibilitou detectar não linearidades na função de reação do BCB sem a necessidade de fazer suposições específicas acerca dos fatores que determinam essas não linearidades. Em específico, nós observamos que: i) a resposta da taxa de juros ao hiato da inflação corrente e esperada foi, em geral, mais forte na parte superior da distribuição condicional da taxa de juros Selic; ii) a resposta ao hiato do produto apresentou uma tendência crescente e significativa na parte inferior da distribuição condicional da taxa Selic; iii) a resposta do BCB à taxa de câmbio real foi positiva e mais elevada na cauda superior da distribuição condicional da taxa Selic. No segundo ensaio, nós investigamos a existência de não linearidades na função de reação do Banco Central do Brasil (BCB) decorrentes de incertezas desse policymaker acerca dos efeitos do hiato do produto sobre a inflação. Teoricamente, nós seguimos Tillmann (2011) para obter uma regra de política monetária ótima não linear que é robusta às incertezas acerca do trade-off produto-inflação na curva de Phillips. Além disso, nós realizamos testes de quebra estrutural para avaliar possíveis mudanças na condução da política monetária brasileira durante o regime de metas de inflação. Os resultados indicaram que: i) as incertezas acerca da inclinação na curva Phillips implicaram em não linearidades na função de reação do BCB; ii) não se pode rejeitar a hipótese de uma quebra estrutural nos parâmetros da regra monetária ocorrendo no terceiro trimestre de 2003; iii) houve um aumento na resposta da taxa Selic ao hiato do produto e uma redução da reação ao hiato da inflação corrente no regime Meirelles- Tombini; e iv) o BCB também tem reagido à taxa de câmbio durante o regime Meirelles- Tombini. No terceiro ensaio, nós procuramos analisar os determinantes da inflação no Brasil através da estimação da Curva de Phillips Novo-Keynesiana (CPNK) proposta por Blanchard e Galí (2007) e a versão padrão proposta por Galí e Gertler (1999). Além disso, realizamos testes de quebras estruturais para avaliar possíveis mudanças na dinâmica da inflação brasileira durante o período de 2002 a 2014. Os resultados indicaram que: i) os testes de quebra estrutural apontam a existência de pelo menos uma mudança estrutural nos coeficientes da CPNK; ii) o componente forward-looking da inflação é dominante, embora sua relevância tenha sido reduzida após 2004; iii) a taxa de desemprego tem afetado negativamente a inflação, embora seja observado uma redução desse impacto nos últimos anos; iv) as mudanças na taxa de câmbio apenas tiveram efeitos sobre a inflação na primeira subamostra e tem perdido relevância no período mais recente; v) o efeito do hiato do produto sobre a inflação corrente diminuiu nos anos recentes; vi) em geral, nós rejeitamos a hipótese nula de uma curva de Phillips vertical no longo prazo a um nível de significância de 5%, mas não a 1%. / This thesis is composed of three essays to address two important issues that are intricately related in macroeconomics: monetary policy and inflation. In the first essay, we seek to investigate nonlinearities in the reaction function of the Central Bank of Brazil (CBB) by estimating inverse quantile regressions (IVQR), suggested by Wolters (2012) and proposed by Chernozhukov and Hansen (2005, 2006). This method enabled us to detect nonlinearities in the CBB’s reaction function without the need to make specific assumptions about the factors that determine these nonlinearities. In particular, we observed that: i) the response of the interest rate to the current and expected inflation was, in general, stronger in the upper tail of the conditional interest rate distribution; ii) the response to the output gap showed a growing and significant trend in the lower tail of the conditional Selic rate distribution; iii) the response of the CBB to the real exchange rate was positive and higher in the upper tail of the conditional Selic rate distribution. In the second essay, we investigate the existence of nonlinearities in the reaction function of the Central Bank of Brazil (CBB) arising from this policymaker’s uncertainties about the effects of the output gap on inflation. Theoretically, we follow Tillmann (2011) to obtain a nonlinear optimal monetary policy rule that is robust to uncertainty about the output-inflation trade-off of the Phillips Curve In addition, we perform structural break tests to assess possible changes in the conduct of the Brazilian monetary policy during the inflation-targeting regime. The results indicate that: i) the uncertainties about the slope in the Phillips curve implied nonlinearities in the CBB’s reaction function; ii) we cannot reject the hypothesis of a structural break in the monetary rule parameters occurring in the third quarter of 2003; iii) there was an increase in the response of the Selic rate to output gap and a weaker response to the current inflation gap in Meirelles Tombini’s administration; and iv) the CBB has also reacted to the exchange rate in Meirelles-Tombini’s administration. In the third essay, we proposed to analyze the determinants of inflation in Brazil through the estimation of the new Keynesian Phillips curve (NKPC) proposed by Blanchard and Galí (2007) and the standard version proposed by Galí and Gertler (1999). In addition, we perform structural break tests to assess possible changes in the dynamics of inflation in Brazil during the period 2002 to 2014. The results indicated that: i) structural break tests indicate the existence of at least one structural change in the coefficients of NKPC ; ii) the forward-looking component of inflation is dominant, though its importance has been reduced after 2004; iii) the unemployment rate has negatively affected inflation, although a reduction of this impact has been observed in recent years; iv) changes in the rate of exchange only had effects on inflation in the first subsample and losing relevance in the most recent period; v) the effect of the output gap on the current inflation has declined in recent years; vi) overall, we reject the null hypothesis of a vertical Phillips curve in the long term at a significance level of 5%, but not 1%.

The dissertation contains essays concerning the linkages between macroeconomy and financial market or the conduct of monetary policy via DSGE modelling. The dissertation contributes to the questions of fitting macroeconomic models to the data, and so contributes to our understanding of the driving forces of fluctuations in macroeconomic and financial variables. Chapter one offers an introduction to my thesis and outlines in detail the main results and methodologies. In Chapter two I introduce a statistical measure for model evaluation and selection based on the full information of sample second moments in data. A model is said to outperform its counterpart if it produces closer similarity in simulated data variance-covariance matrix when compared with the actual data. The "distance method" is generally feasible and simple to conduct. A flexible price two-sector open economy model is studied to match the observed puzzles of international finance data. The statistical distance approach favours a model with dominant role played by the expectational errors in foreign exchange market which breaks the international interest rate parity. Chapter three applies the distance approach to a New Keynesian model augmented with habit formation and backward-looking component of pricing behaviour. A macro-finance model of yield curve is developed to showcase the dynamics of implied forward yields. This exercise, with the distance approach, reiterate the inability of macro model in explaining yield curve dynamics. The method also reveals remarkable interconnection between real quantity and bond yield slope. In Chapter four I study a general equilibrium business cycle model with sticky prices and labour market rigidities. With costly matching on labour market, output responds in a hump-shaped and persistent manner to monetary shocks and the resulting Phillips curve seems to radically change the scope for monetary policy because (i) there are speed limit effects for policy and (ii) there is a cost channel for monetary policy. Labour reforms such as in mid-1980s UK can trigger more effective monetary policy. Research on monetary policy shall pay greater attention to output when labour market adjustments are persistent. Chapter five analyzes the link between money and financial spread, which is oft missed in specification of monetary policy making analysis. When liquidity provision by banks dominates the demand for money from the real economy, money may contain information of future output and inflation due to its impact on financial spreads. I use a sign-restriction Bayesian VAR estimation to separate the liquidity provision impact from money market equilibrium. The decomposition exercise shows supply shocks dominate the money-price nexus in the short to medium term. It also uncovers distinctive policy stance of two central banks. Finally Chapter six concludes, providing a brief summary of the research work as well as a discussion of potential limitations and possible directions for future research.

This dissertation is divided into four essays, each of them having its own structure and methodological framework. Although each of the essays making the chapters of the thesis is self-contained, their topics are very closely related. Consequently, the reader will be able to follow the thesis in its unity. Essay I is a selective survey of the extensive, mostly theoretic, literature dealing with monetary policy rules. We aim at contextualization of the monetary policy rules in the existing monetary economics literature. We explain the logic, the inspiration and the history of the rules for the monetary policy conduct. We distinguish between instrument rules and targeting rules as two basic categories. Finally, we resume specific issues related to policy rules for small open economies. Essay II studies the logic of short-term interest rate setting pursued by 15 EU countries before and after the launch of the EMU. We employ econometric estimation of the augmented Taylor rule (TR) for individual 15 EU countries and the Euro area. Although a vast empirical evidence is available for the major economies like the US, the UK or Germany, there is an important gap in our understanding of the factors behind the short-term interest rate dynamics in smaller economies. We find that in the period preceding the euro adoption, the TR is a poor representation of monetary policy setting in most EU countries and that many central banks considered decisions made by dominant economies rather than their domestic macroeconomic developments. The analysis of monetary policy rule of the ECB features additional problems related to the heterogeneity of the EMU. We argue that results based on Euro-area aggregated series, commonly presented in empirical studies, are subject to diverse econometric problems. We provide some evidence that the ECB is concerned also with national information and propose quasi-panel analysis as a viable framework. Essay III explores the relation between the existing monetary policy and domestic price stability in small open emerging economies, in particular the 12 EU new member states. This work has three principal objectives. First, it aims at revealing the logic of interest rate setting pursued by monetary authority of each country. The linear specification of the Taylor rule, applied already in the Essay II, is accompanied by an extensive analysis of nonlinearities in monetary policy rules and the inference on their possible sources. We find that the official monetary policy is sometimes inconsistent with the empirical evidence on the short term interest rate setting. The second objective consists in revealing the determinants of the inflation process. We have found that inflation rates are driven not only by backward persistency but also by the forward-looking component. Third, we employ analysis of the conditional inflation variance so as to give account on the viability of the existing monetary policy setting for price stability. We conclude that the policy of inflation targeting seems to be preferable to exchange rate peg because it allows decreasing not only inflation rate but also its conditional variance. Essay IV seeks to shed light on inflation dynamics of four CEEC (Czech Republic, Hungary, Poland and Slovakia) and test when the predominant model of inflation, the New Keynesian Philips Curve (NKPC), is consistent with the data of these countries. According to the microfounded NKPC, the current inflation is related to inflation expectations and the real marginal cost. The empirical validity of this model has recently become a subject of major controversy in the monetary economics. Although we find some favorable evidence for the NKPC, it seems to be too restrictive model for small open economies. In particular, the failure of the NKPC to explain the inflation dynamics of these countries may be related to the assumption that inflation is related to forward-looking price setting of domestic monopolist firms while our evidence suggests that prices in CEEC have an important backward-looking component and the inflation is significantly driven by external factors like the exchange rate and the foreign inflation rate.

Made available in DSpace on 2015-03-05T18:57:21Z (GMT). No. of bitstreams: 0 Previous issue date: 30 / Coordenação de Aperfeiçoamento de Pessoal de Nível Superior / Este trabalho investiga a função de reação de política monetária, seguindo a abordagem da Regra de Taylor para avaliar o desempenho dessa política, conduzida pela Reserva Federal (FED), pelo Banco do Japão (BOJ) e pelo Banco Central Europeu (ECB), durante o período selecionado para a pesquisa. Considerou-se para a análise, tanto para o FED como para o BOJ, o período de janeiro de 1990 até junho de 2008; enquanto que para o ECB, em virtude da constituição da Área do euro, a análise abrange janeiro de 1998 a junho de 2008. Inicialmente, é realizada a revisão da literatura sobre discricionariedade versus regras de política monetária, em que são apresentados alguns resultados empíricos sobre o uso de regras na condução da política monetária. Num segundo momento, faz-se uma abordagem sobre como estão estruturados os bancos centrais e os sistemas de pagamentos dos países selecionados. Além disso, traçam-se considerações sobre o regime monetário e cambial de cada economia e faz-se também uma breve retrospectiva da c / This work investigates the function of reaction of monetary policy following the approach of the Taylor Rule to evaluate the performance of this policy, lead for the Federal Reserve (FED), for the Bank of Japan (BOJ) and for European Central Bank (ECB), during the period selected for the research. It was considered for the analysis, as much for the FED how much for the BOJ, the period of January 1990 until June 2008; whereas for the ECB, in virtue of the constitution of the Euro Area, the analysis encloses January 1998 until June 2008. Initially, the revision of literature on discretion versus rules of monetary policy is made, where some empirical results on the use of rules in the conduction of the monetary policy are presented. At as a moment, approach becomes on as the central banks and the systems of payments of the selected countries are structuralized. Moreover, considerations are traced on the monetary and exchange regimen of each economy and become one brief retrospective of the management of the mone