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

Abstract

We examine how a more hawkish policy stance – defined as an abovemedian 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 inflationtargeting 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.