Panel data analysis on inflation targeting regime and Taylor rule in developed and developing countries

It is seen that the effectiveness of monetary policy increases when central banks follow a rule-based approach in determining policy interest rates. Taylor Rule applied to inflation targeting regime practices and rule-based approaches in monetary policy in most of the developed and developing countries. The aim of this study is to test macroeconomic factors that are effective in determining the policy interest rates in countries that have adopted the Inflation Targeting Regime as the main monetary policy strategy targeting direct inflation to ensure price stability and to provide a comparison to developed and developing countries. In this context, for 2008Q1 and 2008Q4 periods, data from 10 countries were used,5 of which are developed (New Zealand, Israel, Sweden, England, Finland) and 5 of which are developing countries(Turkey, Mexico, Hungary, Brazil, Poland).While the original Taylor Rule was taken as reference in the modelling of developed countries sample, the developing countries sample was modelled with expanded Taylor Rule which also takes the exchange rates into account. Under the Taylor Rule, interbank money market interest rate, real interest rate, inflation rate, output deficit, inflation deficit and exchange rate deficit variables were used. Open variables were obtained by Hodrick Prescott filtering technique. After the unit root analysis of all variables in the study, the models were estimated from the estimation methods of heterogeneous panel data models by means of Seemingly Unrelated Regression Estimator and Extended Average Group Estimator. According to the findings of the study, it is concluded that developed countries are sensitive to real interest rate, inflation rate and output deficit variables while developing countries are sensitive to real interest rate, Outputgap and inflation gap variables.