NONLINEAR AND TIME-VARYING HETEROGENEITY OF THE SPATIAL EFFECT OF G20 COUNTRIES’ MONETARY POLICIES

Abstract

This study examines how nonlinear and time-varying heterogeneity of the spatial spillover effects of price-based and quantitative monetary policy instruments affect G20 countries’ economic growth by building spatial panel smooth transition models with a trade geography weight matrix. We find spatial dependence between economic growth and monetary policy in G20 countries. Then, we use G7+Spain and BRICS to represent developed and emerging economies, respectively, and re-estimate the spatial fixed effect. G7 countries’ quantitative monetary policy is not significant, and reduced interest rates do not improve GDP; however, both increased money supply and reduced interest rates improve BRICS countries’ GDP. Furthermore, lower interest rates in G7 countries cannot improve GDP during bad times, but during good times, price-based monetary policy effectiveness is improved. Although economic conditions do not affect BRICS countries’ quantitative regulation, they do influence price-based monetary policy’s effects. Neighboring countries’ price-based regulation brings different degrees of spillovers to domestic GDP using both linear and nonlinear models.