The effects of key parameters of the monetary policy reaction function on economic growth

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 (IT) countries. To this end, we estimate time-varying, bias-corrected forward-looking Taylor rules for all IT countries for which the data permit such estimation. Our results point to sizable growth effects, exceeding 0.8% 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.