ABSTRACT
This study investigates the asymmetric effects of monetary policy shocks on the macroeconomic variables of exchange rate, output and inflation for an emerging economy ‒ Turkey ‒ by using monthly data between 1990 and 2014. We employ the innovative nonlinear vector autoregressive model of Kilian and Vigfusson (2011), which allows us to observe the effect of different stances (tight or loose) and different sizes (small or large) of monetary policy actions. Our empirical evidence reveals that tight monetary policy, which, in this case, is captured with a positive shock to interest rate, decreases exchange rate, output and prices, as economic theory suggests. Loose monetary policy, which is captured with a negative shock to interest rate, has the opposite effect on these variables. However, the effects of loose monetary policy are weaker than the effects of tight monetary policy because loose monetary policy shocks are less effective than tight monetary policy shocks. Moreover, as the magnitude of a shock increases, the difference between the effects of tight and loose monetary policy policies also increases.
Acknowledgements
The authors would like to thank Rana Nelson for her helpful comments.
Notes
Morgan, D. P. 1993. “Asymmetric Effects of Monetary Policy.” Economic Review 78 (Q II): 21–33. Caballero, R., and E. M. R. A. Engel. 1992. Price Rigidities, Asymmetries, and Output Fluctuations. No. w4091. Cambridge, MA: National Bureau of Economic Research. http://www.nber.org/papers/w4091.pdf Ball, L., and N. G. Mankiw. 1994. “Asymmetric Price Adjustment and Economic Fluctuations.” The Economic Journal 104 (423): 247. doi:10.2307/2234746. Ravn, M. O., and M. Sola. 1996. “A Reconsideration of the Empirical Evidence on the Asymmetric Effects of Money-Supply shocks: Positive vs. Negative or Big vs. Small?” SSRN Electronic Journal. doi:10.2139/ssrn.56134. Weise, C. L. 1999. “The Asymmetric Effects of Monetary Policy: A Nonlinear Vector Autoregression Approach.” Journal of Money, Credit and Banking 31 (1): 85. doi:10.2307/2601141. Garcia, R., and H. Schaller. 2002. “Are the Effects of Monetary Policy Asymmetric?” Economic Inquiry 40 (1): 102–119. doi:10.1093/ei/40.1.102. Lo, M. C., and J. M. Piger. 2005. “Is the Response of Output to Monetary Policy Asymmetric? Evidence from a Regime-Switching Coefficients Model.” Journal of Money, Credit, and Banking 37 (5): 865–886. doi:10.1353/mcb.2005.0054. Tan, S.-H., and M. S. Habibullah. 2007. “Business Cycles and Monetary Policy Asymmetry: An Investigation Using Markov-Switching Models.” Physica A: Statistical Mechanics and Its Applications 380: 297–306. doi:10.1016/j.physa.2007.02.063. Vašíček, B. 2012. “Is Monetary Policy in the New EU Member States Asymmetric?” Economic Systems 36 (2): 235–263. doi:10.1016/j.ecosys.2011.07.003. Sznajderska, A. 2014. “Asymmetric Effects in the Polish Monetary Policy Rule.” Economic Modelling 36: 547–556. doi:10.1016/j.econmod.2013.09.045. Georgiadis, G. 2015. “Examining Asymmetries in the Transmission of Monetary Policy in the Euro Area: Evidence from a Mixed Cross-Section Global VAR Model.” European Economic Review 75: 195–215. doi:10.1016/j.euroecorev.2014.12.007. DeLong, J. B., and L. H. Summers. 1988. “How Does Macroeconomic Policy Affect Output?” Brookings Papers on Economic Activity 1988 (2): 433–494. doi:10.2307/2534535. Cover, J. P. 1992. “Asymmetric Effects of Positive and Negative Money-Supply Shocks.” The Quarterly Journal of Economics 107 (4): 1261–1282. doi:10.2307/2118388. Morgan, D. P. 1993. “Asymmetric Effects of Monetary Policy.” Economic Review 78 (Q II): 21–33. Rhee, W., and R. W. Rich. 1995. “Inflation and the Asymmetric Effects of Money on Output Fluctuations.” Journal of Macroeconomics 17 (4): 683–702. doi:10.1016/0164-0704(95)80089-1. Garibaldi, P. 1997. “The Asymmetric Effects of Monetary Policy on Job Creation and Destruction.” Staff Papers – International Monetary Fund 44 (4): 557. doi:10.2307/3867466. Karras, G., and H. H. Stokes. 1999. “Why are the Effects of Money-Supply Shocks Asymmetric? Evidence from Prices, Consumption, and Investment.” Journal of Macroeconomics 21 (4): 713–727. doi:10.1016/S0164-0704(99)80003-2. Karras, G. 2013. “Asymmetric Effects of Monetary Policy with or without Quantitative Easing: Empirical Evidence for the US.” The Journal of Economic Asymmetries 10 (1): 1–9. doi:10.1016/j.jeca.2013.04.001. Karras, G., and H. H. Stokes. 1999. “Why are the Effects of Money-Supply Shocks Asymmetric? Evidence from Prices, Consumption, and Investment.” Journal of Macroeconomics 21 (4): 713–727. doi:10.1016/S0164-0704(99)80003-2. Shen, C.-H. 2000. “Are the Effects of Monetary Policy Asymmetric? The Case of Taiwan.” Journal of Policy Modeling 22 (2): 197–218. doi:10.1016/S0161-8938(98)00025-8. Zakir, N., and W. S. Malik. 2013. “Are the Effects of Monetary Policy on Output Asymmetric in Pakistan?” Economic Modelling 32: 1–9. doi:10.1016/j.econmod.2013.01.037.