Asymmetric Effect of Monetary Policy in Emerging Countries: The Case of Egypt

Abstract

The aim of this study is to explore the asymmetric effect of the unanticipated monetary policy shocks on inflation and real production. This is done by utilizing the non-linear autoregressive distributed lag (ARDL) model.  Nonlinear ARDL allows us to check for the asymmetric effect of the policy in terms of the size of the shocks: large or small, and the stance of the shocks: loose or tight. Additionally, Wald test is employed to confirm the underlying relationship. The results provided a sufficient evidence for the idea of the asymmetric effect of monetary policy in Egypt. Firstly, regarding the size of the policy, only small shocks have a considerable effect on both inflation and real production. Secondly, regarding the direction of the policy, only positive shocks have a considerable influence on both variables. Wald test confirmed the abovementioned results. Therefore, based on these results, the monetary policy in Egypt is only effective under some circumstances and thus other economic policies such as fiscal policy might be more effective in these cases.