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The view that tight and easy monetary policy produces asymmetric effects on economic activity has long been recognized in policy debates and in the academic profession (Johnson, 1962). The behavior of the U.S. economy during the 1990-92 recession, when successive cuts in the federal fund rate failed to produce economic recovery, seemed to confirm the traditional view. Furthermore, recently collected empirical evidence for both the United States (De Long and Summers 1988, Cover 1992, Morgan 1993) and Europe (Karras, 1996) strongly support the hypothesis that negative money-supply shocks and/or increases in interest rates reduce output more than monetary expansions raise it.
This paper offers evidence of the asymmetric effect of monetary policy on economic activity. First, asymmetric adjustment is captured in three macroeconomic relationships for investment, the consumer price deflator, inventories and house prices. These relationships are then embedded in a small macroeconometric model of the UK economy. Simulations on this model allow us to trace through the interactions of these asymmetries so that a monetary shock, measured by a change in interest rates, affects output and inflation in the short run in ways dependent both upon the sign of the shock and the initial state of the economy. A monetary easing has significantly larger effects on inflation when the economy is close to capacity compared with when it is in recession. These effects are captured by intrinsic asymmetries in the model, due to the use of the logarithm of interest rates and the logarithm of unemployment in the wage equation, as well as the asymmetries coming from the non-linearities which we have introduced explicitly.
This book is a collection of state-of-the-art papers on the properties of business cycles and financial analysis. The individual contributions cover new advances in Markov-switching models with applications to business cycle research and finance. The introduction surveys the existing methods and new results of the last decade. Individual chapters study features of the U. S. and European business cycles with particular focus on the role of monetary policy, oil shocks and co movements among key variables. The short-run versus long-run consequences of an economic recession are also discussed. Another area that is featured is an extensive analysis of currency crises and the possibility of bubbles or fads in stock prices. A concluding chapter offers useful new results on testing for this kind of regime-switching behaviour. Overall, the book provides a state-of-the-art over view of new directions in methods and results for estimation and inference based on the use of Markov-switching time-series analysis. A special feature of the book is that it includes an illustration of a wide range of applications based on a common methodology. It is expected that the theme of the book will be of particular interest to the macroeconomics readers as well as econometrics professionals, scholars and graduate students. We wish to express our gratitude to the authors for their strong contributions and the reviewers for their assistance and careful attention to detail in their reports.
The paper deals with the asymmetric effects on output of tight and easy monetary policy: the output reduction following a negative monetary policy shock appears bigger than the expansion induced by similar sized positive shock. The paper first reviews historical evidence of asymmetry, focusing on the United States, Japan and Italy. This is followed by a review of the econometric literature on monetary policy asymmetry and consideration of the theoretical reasons that can explain this asymmetry.
Recent empirical studies examining the asymmetric effects of monetary shocks on economic activity do not systematically control for the non-monetary sources of fluctuations as well as the endogenous component of monetary policy. The evidence of asymmetry could simply reflect the failure to control for these omitted factors. In this paper, we reconsider the asymmetric effects of monetary shocks in the context of a small open economy using information from the yield curve to measure the stance of domestic monetary policy, while allowing both real and monetary foreign shocks to have asymmetric effects on output. Our principal finding is that while controlling for foreign factors dampens the asymmetry in the effects of exogenous domestic monetary shocks, there is nonetheless strong evidence of asymmetry when the effects of the exogenous and systematic components of the yield spread are considered jointly. We find no evidence of asymmetry in the effects of real factors.
Empirical studies have documented the presence of asymmetric effects of monetary policy. In this monograph both empirical and theoretical research is conducted. Firstly, the literature on the asymmetric efects of monetary policy is surveyed. Secondly, an empirical analysis is done: the U.S. data is tested for the asymmetric efects of monetary policy using a Markov-switching model. Finally, as the main part, a theoretical analysis is conducted using a standard New Keynesian model with the Zero Lower Bound constraint on the nominal interest rate. The issue of asymmetries is important for the policymakers in order to conduct a monetary policy in the most effective way.
Abstract: We estimate a time-varying coefficient VAR model for the U.S. economy to analyse (i) if the effect of monetary policy on output has been changing systematically over time, and (ii) if monetary policy has asymmetric effects over the business cycle. We find that the impact of monetary policy shocks has been gradually declining over the sample period (1962-2002), as some theories of the monetary transmission mechanism imply. In addition, our results indicate that the effects of monetary policy are greater in a recession than in a boom