MODELING MONETARY POLICY RULES IN THE MENA COUNTRIES: ISSUES AND EVIDENCE

Year 2011, Volume: 3 Issue: 2, 309 - 318, 01.12.2011

Mohamad Husam Helmi

Abstract

This paper estimates the monetary policy reaction function for two sets of MENA
countries: The inflation target countries, (Turkey and Israel) and the exchange rate
target countries, (Jordan and Morocco). We motivate our empirical analysis by
analyzing a simple Taylor rule. This model looks at the effects of inflation and
output on setting the interest rate by the central bank. Furthermore, we extended
our model by adding the exchange rate and the foreign interest rate using similar
model used by Clarida et al (1998) with using GMM estimator.
Findings of this study yield some interesting results, all the central banks in the
sample uses interest rate smoothing in managing their monetary policy. In
addition, The Central bank in Turkey, Israel and Morocco focuses on achieving
low level of inflation. On the other hand, the Monetary Authority in Jordan cares
about stabilizing the output gap. Estimating the extended Taylor rule suggests the
highly significant effect of foreign interest rate on setting the interest rate in
Turkey. Taken all together, the results lend support to the importance of following
a rule rather than discretionary in reducing the inflation rate and credible
monetary policy. In addition, the simple Taylor rule can be applied on MENA
countries but it requires some modification such as adding the exchange rate and
the foreign interest rate.

Keywords

Taylor Rule, Monetary Policy, Exchange rate

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