Modelling Non-Linearities and Asymmetries in Algerian Monetary Policy: Evidence from Extended Taylor Rules

This study investigates the determinants of the Money Market Rate (MMR) in Algeria, examining the role of the real exchange rate (RER), output gap, and consumer price index (CPI) within a nonlinear framework.Employing unit root tests, cointegration analysis, causality tests, quantile autoregressive distributed lag (QARDL) modelling, and multithreshold nonlinear autoregressive distributed lag (MTNARDL) modelling, we analyse quarterly data from 2000 to 2021.The results indicate that while traditional Taylor Rule variables show limited influence on the MMR, the RER has a significant, heterogeneous, and asymmetric impact.Specifically, large changes in the RER positively affect the MMR in the long run, and both small-to-medium and large RER shocks influence the MMR in the short run.QARDL results also point to a nuanced monetary policy response, with inflation having a significant impact only when it is low and the output gap having a more significant effect at lower quantiles.Our findings underscore the need for Algerian monetary policy to focus on the magnitude of exchange rate fluctuations and to move beyond linear policy models.This study provides insights into the complex dynamics of monetary policy in a developing economy, highlighting the importance of considering asymmetries and nonlinearities.