MAGKS Joint Discussion Paper Series in Economics No. 08-2018
Do central banks in Eastern European countries react asymmetrically and in a non-linear fashion to changes in inflation and output? We tackle this question by expanding the standard Taylor reaction function for the four inflation targeting countries Czech Republic, Hungary, Poland and Romania. We do so taking explicitly inflation rates below or above target and output below or above potential, the so-called state of the economy, into account. The results reveal that there are indeed substantial asymmetries in the reaction function of the Czech, Polish and Romanian central bank, which are only evident when the combination of inflation and output thresholds is explicitly modelled in one estimation equation. For these three central banks also non-linearities in the inflation and output response could be verified.
Taylor reaction function Asymmetries Eastern European countries Iran