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

Makram El-Shagi () and Paul Philemon Lukuliko ()
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Makram El-Shagi: Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan
Paul Philemon Lukuliko: Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan

No 2026/1, CFDS Discussion Paper Series from Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China

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.

Keywords: Economic growth; inflation targeting; monetary policy reaction function; hawkishness (search for similar items in EconPapers)
JEL-codes: E52 E58 O40 O47 (search for similar items in EconPapers)
Date: 2026-03
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