Monetary policy asymmetric effects and economic freedom: a panel interactive model approach

Purpose This paper aims to study monetary policy effectiveness conditional on economic freedom across countries. Design/methodology/approach We analyze a panel of 167 countries from 2001 to 2022 using instrumental variable techniques within an interactive econometric framework. Robustness checks are performed to validate the findings. Findings Monetary policy positively influences output growth in all countries analyzed. However, its effectiveness diminishes in nations with higher levels of economic freedom. Specifically, when the Economic Freedom Index reaches approximately 2.6, a 1 percentage point increase in the monetary base correlates with a 3 percentage point increase in GDP growth. In addition, contractionary policies exhibit a stronger effect on output than expansionary policies. Originality/value This paper provides novel evidence that the institutional environment, measured through economic freedom, significantly conditions the transmission of monetary policy. The findings have implications for tailoring macroeconomic strategies to institutional contexts.