Responsiveness of Monetary Policy to Economic Uncertainty: Evidence from the ASEAN-5 Plus 3 Countries

Abstract

A notable feature of empirical research on the monetary policy rule is that not many studies
rely on the responsiveness of the monetary policy to the goals of the central bank. Policy
responsiveness aligns with the appropriate relative weights placed on the goals following their
priority. To overcome this shortcoming, this study uses open economy Taylor rule in economic
uncertainty and examines its empirical validity based on a sample of ASEAN five plus three
countries, including Indonesia, Malaysia, Philippines, Singapore, Thailand, South Korea,
Japan, and China. By employing the autoregressive distributed lag (ARDL) model, this study
examines the long-run and the short-run relationships between economic uncertainty (i.e.
output uncertainty, inflation rate uncertainty, and exchange rate uncertainty) and monetary
policy. Additionally, this study examines the responsiveness of monetary policy in economic
uncertainty for goal-based performance measures. The findings provide some policy
implications; (i) both in the long run and/or short run, the central bank should consider the
policy variables (namely, output, inflation rate, and the exchange rate) underlying the premise
of unforeseen future economic events in its monetary policy decision makings for the best
economic outcomes, and (ii) the responsiveness of monetary policy to the central bank’s goals
can serve as a benchmark (namely, the size of the weights in policy rule) in aligning smooth
movements of the policy rate.