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