An essay on the Mongolian monetary policy

Abstract

In this essay, we proposed two hypothesis on the Mongolian monetary policy rule. In order to answer the hypothesis we estimate a New Keynesian dynamic stochastic general equilibrium (DSGE) model of a small open economy (SOE) via the Bayesian estimation technique. We use the posterior odds test focusing on the modified generic Taylorrule monetary policy, where the monetary authority reacts in response to inflation deviations from inflation target rates, output gaps, and exchange-rate movements. The main result is that the central bank of Mongolia (Bank of Mongolia - BoM) do not concern inflation target rates and systematically respond to nominal exchange rate (NER) changes when setting its monetary policy rule. We also find that
terms-of-trade (ToT) movements do not contribute significantly to domestic business cycles.