Asymmetric Effects of the Monetary Policy on Inflation and Output Gap in Iran: A Threshold Approach

This paper investigates the monetary policy reaction of the Central Bank of Iran with threshold effects. The estimation of the nonlinear reaction function is carried out using a two-step procedure. At first step of this procedure, we follow Caner and Hansen's (2004) threshold approach. Using the Taylor empirical rules and threshold variables including inflation and output gap we estimate the relevant threshold values. Then, to infer the monetary policy preferences, we employ these threshold values to estimate the asymmetric policy reaction function specified by Favero and Rovelli (2003) and Komlan(2013).This is done by Generalized Method of Moment (GMM). Experimental results show that the asymmetry parameter of the output gap is statistically significant. Thus, the Central Bank reacts more vigorously to negative than to positive output gaps. Also, the results suggest that Central Bank reacts only when the inflation rate is higher than the threshold. This fact indicates that the monetary authorities seek to improve the output and employment, and the priority of controling inflation rate is not considered during the study period.