https://phaidrabg.bg.ac.rs/o:28761 doi:10.2478/jcbtp-2022-0014 ISSN: 1800-9581 Abstract: The subject of this paper is the evaluation of monetary pol- icy reaction function on panel data of 37 world economies, both ad- vanced and emerging markets, during the period of 1995Q1 – 2018Q3. The paper aims to evaluate the role and importance of the exchange rate in monetary policy reaction function depending on the level of economic development. For this purpose, a relevant set of unbal- anced panel data was formed with a balanced relationship between developed and emerging market economies. The methodology of empirical research is based on the econometric assessment of mon- etary policy reaction function within which the central bank adjusts its key policy rate to the dynamics of inflation, output gap and fluc- tuations of the real effective exchange rate. The research results con- firm the hypothesis that the exchange rate represents a statistically significant variable only in the monetary policy reaction function of emerging market economies. In contrast, adequate specification of developed economies' monetary policy rule includes only standard macroeconomic fundamentals – inflation and output gap. Keywords: monetary policy reaction function, Taylor rule, panel data analysis, exchange rate, developed countries, emerging market economies info:eu-repo/semantics/article Fabris, Nikola Lazić, Milena 2022 eng http://creativecommons.org/licenses/by/4.0/legalcode Journal of Central Banking Theory and Practice 11(2) Evaluating the Role of the Exchange Rate in Monetary Policy Reaction Function of Advanced and Emerging Market Economies application/pdf 1799048 bytes