Monetary shocks, output and inflation – evidence from asymmetric causality test

Tamilarasi Rajappa and Sartaj Rasool Rather

Applied Economics Letters, 2022, vol. 29, issue 12, 1121-1124

Abstract: This study examines whether the positive and negative unanticipated monetary shocks have asymmetric causal impact on real output growth and inflation rate. In particular, we examine whether the asymmetry observed in the impact of these shocks on output is consistent with that of inflation as predicted by menu cost models. The empirical results indicate that the positive monetary shocks tend to cause an increase in price whereas the negative monetary shocks have no impact. On the other hand, the negative monetary shocks cause a fall in real output; however, the positive monetary shocks seem to have no impact. The crucial implication of these findings is that the positive monetary shocks tend to be inflationary with less or no impact on real output whereas the negative monetary shocks cause reductions in real output with no or less impact on inflation.

Date: 2022
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DOI: 10.1080/13504851.2021.1910130

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