THE MODIFIED TAYLOR RULE FOR BANK OF UZBEKISTAN ON THE BASIS OF MODE SWITCHING

Sardor Sadykov

Abstract

Uzbekistan and foreign studies prove that the policy of central banks can be described by one or another version of the Taylor Rule. The Taylor Rule is a rule of a monetary policy, which defines how the interest rate changes in case of a change in GDP and inflation indicators. In particular, it states that for each percent of inflation growth a central bank has to increase the nominal interest rate by more than one percentage point. This aspect is often called the Taylor principle. We made an empirical assessment of the efficiency of the Central Bank of Uzbekistan policy and built an econometric model based on the nonlinear least square method. We used the data on inflation rate and GDP size from the official site of the Department of statistics of Uzbekistan, and the inflation data from annual reports of the Central Bank of Uzbekistan on principal direction of the unified State monetary policy. We calculated the GDP gap as a difference between the quarterly GDP value and its trend generated with the help of the Hodrick–Prescott filter. The results of the developed model enabled to conclude that all indicators turned out to be significant. According to the original Taylor’s work, the coefficient of inflation gap is 1.5, and the coefficient of GDP gap is 0.5. In our case, the coefficient of inflation gap was lower and made 1.13, and the coefficient of GDP gap – 0.4. On the basis of our calculations (the Chow test and evaluation of two econometric models for two sub-samplings: during pre-crisis and post-crisis periods), we found out that it is economy during crisis periods. We believe it is necessary to develop the Taylor Rule, which the Bank of Central Bank of Uzbekistan can use in inflation targeting based on crisis situations.


Key words

Taylor’s model; monetary policy; inflation targeting.


JEL Codes: C36, D84, E31, E52


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