Monetary Policy Decisions in Selected Organization of Petroleum Exporting Countries Economies: Does Taylor's Principle Matter?

Many OPEC countries heavily rely on the hydrocarbon sector as the lifeblood of their economies. The uncertainty of crude oil price environment makes them vulnerable to external shocks. Therefore, knowledge about drivers of economic policies especially monetary policy designed to accommodate shocks calls for empirical research with the recent global oil environment. This study examines the drivers of monetary policy rate in selected OPEC economies and tests whether these factors follow Taylor's rule using monthly time series data from 1990 to 2015. Its finding reveals that inflation gap and output gap are effective in influencing policy rate in Indonesia, whereas only inflation gap influences the policy rate in Nigeria. In addition, the level of policy rate in Saudi Arabia and Venezuela is determined by the level of output gap in the baseline Taylor model. The outcome of the augmented Taylor model supports the smoothing behaviour of the monetary authorities in the economies. In conclusion, none of these economies follow Taylor's principle in their monetary policy decisions.