Regime Switching Monetary Policy and Nonlinear Taylor Rule in African Open Economies

• Author(s): Murtala Abdullahi Kwarah
• Paper ID: 1703218
• Page: 235-251
• Published Date: 27-02-2022
• Published In: Iconic Research And Engineering Journals
• Publisher: IRE Journals
• e-ISSN: 2456-8880
• Volume/Issue: Volume 5 Issue 8 February-2022

Abstract

The study is theoretical, entitled the 'Regime Switching Monetary Policy and Nonlinear Taylor Rule in African Open Economies Explore'. The essay examined the responses of the monetary policy authorities to the volatility of their exchange rate. The study employed a baseline methodology, and the empirical specifications revealed the linearised objective function of the sample countries' central banks, which is consistent with theoretical the theory of the Taylor rule, and presented the relation of the central banks that targets deviation of the actual output from its potential level and the deviation of the actual inflation from the expected inflation. Further, the test for nonlinearity conducted in this study aligns with Franses and van Dijik’s (2000; 2003) procedure. The study concluded that the smoothing parameter (i_(t-1)) is the transition variable in Botswana and Morocco. In the cases of Egypt and South Africa, inflation is the primary variable that causes regime switch; hence it represents the transition variable in both countries. Finally, the monetary policy in the high exchange rate regime Botswana and South Africa are faced with much higher inflation than Egypt and Morocco. Therefore, the monetary policy response is tightening to reduce the effects of the higher inflation experienced in an exchange rate depreciating regime. Output gap increases across all the countries under the exchange rate depreciating regime. This suggests instability in output which is accompanied by significant falls in the exchange values of all the currencies. However, the results showed that Egyptian pounds are not depreciating significantly compared to the other currencies.

Citations

IRE Journals:
Murtala Abdullahi Kwarah "Regime Switching Monetary Policy and Nonlinear Taylor Rule in African Open Economies" Iconic Research And Engineering Journals Volume 5 Issue 8 2022 Page 235-251

IEEE:
Murtala Abdullahi Kwarah "Regime Switching Monetary Policy and Nonlinear Taylor Rule in African Open Economies" Iconic Research And Engineering Journals, 5(8)