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The Effects of Key Parameters of the Monetary Policy Reaction Function on Economic Growth

Author

Listed:
  • Makram El-Shagi

    (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)

  • Paul Lukuliko Philemon

    (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)

Abstract

We examine how a more hawkish policy stance – defined as an above- median long-run inflation semi-elasticity of the policy rate – affects economic growth in 37 inflation-targeting countries. To this end, we estimate time-varying, bias-corrected forward-looking Taylor rules for all inflation- targeting countries for which the data permit such estimation. Our results point to sizable growth effects, exceeding 0.5 percent annually, for countries with a more hawkish policy stance. This suggests that the growth benefits reported in the previous literature on inflation targeting are primarily driven by a small subset of countries that react more forcefully to inflation.

Suggested Citation

  • Makram El-Shagi & Paul Lukuliko Philemon, 2026. "The Effects of Key Parameters of the Monetary Policy Reaction Function on Economic Growth," CFDS Discussion Paper Series 2026/1, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
    • Handle: RePEc:fds:dpaper:202601
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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