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Regular version of the site

Working paper

A model for ordinal responses with an application to policy interest rate

NBP working papers. 148. NBP, 2013. No. 148.
Sirchenko A.
The decisions to reduce, leave unchanged, or increase an ordered choice variable (such as a policy rate) are often characterized by abundant no-change outcomes that may be generated by di¤erent processes. In addition, the decreases and increases may also be driven by distinct decision-making paths. Neither standard nor zero-in‡ated models for ordinal responses are well-suited to address these issues. This paper develops a ‡exible mixture model with endogenously switching regimes. Three latent regimes, interpreted in the interest rate setting context as loose, neutral and tight policy stances, create separate processes for the rate hikes and cuts, and overlap at a status quo outcome, generating three di¤erent types of zeros. The new model shows good small-sample performance in Monte Carlo experiments, whereas the traditional models deliver biased estimates of choice probabilities and marginal e¤ects. In an application to the policy rate, not only is the new model strongly favored by the statistical tests, but it also produces economically more meaningful estimates with respect to the existing models, and shows that only sixty percents of zeros are generated by a neutral policy stance, suggesting a high degree of intentional interest-rate smoothing.