Asymmetric Effects of the Repo Rate and Inflation Rate Shocks on Economic Growth

Abstract

This chapter applies the threshold techniques to examine the role of the inflation regime. Based on the established threshold, we find evidence that a contractionary monetary policy shock has more potent effects relative to an expansionary monetary policy shock in a high inflation regime. Furthermore, an increase in inflation in both high and low inflation regimes has negative effects on economic growth. On the contrary, a decline in inflation has more beneficial effects on economic growth and has a larger impact in a high inflation regime than in a lower inflation regime. Inflation exerts more adverse effects on economic growth relative to the repo rate. In policy terms, the results suggest that inflation thresholds and the non-linear transmission of shocks can assist the policymaker in sharpening the communication and transparency in an effort to lower inflation expectations. The credibility problem cannot be solved by transparency alone.