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Working Paper 113 - Monetary Policy Conduct Based on Nonlinear Taylor Rule: Evidence from South Africa


Many studies have tested the Taylor rule for monetary policy conduct internationally. However, there have been few studies carried out for emerging markets. Studies undertaken by Petersen (2007), Castro (2008) and Cukierman (2004) mainly focus on nonlinear models in developed economies such as the US and UK. Notably, there is a gap within emerging markets in particular South Africa that presents an opportunity for the utilization of nonlinear models to characterize the behaviour of the Reserve Bank using interest rate functions. Interest rate reaction functions have normally been formulated using the linear Taylor rule. This could be attributed to the notion that linear models on several cases are perceived to render reasonable approximations to the exact nonlinear interactions.

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