X is a set of variables that may be part of the policy reaction function. ε is an error term
that contains country fixed effect parameter, _i, and time-specific fixed effects, ut (i.e.
εi,t = _i + ut + vit), and vit are assumed to be independent and identically distributed with
mean zero and variance σ2. By investigating variation within countries, the control for
country fixed effects addresses the potential for omitted variable bias and improves the
inference on the causal effect of IT on dependent variable. ρ, α, β and γ are denoted as
the reaction coefficients for lagged interest rate, output gap, inflation gap and real
exchange rate change, respectively.