This paper o¡ers evidence of the asymmetric e¡ect of monetary policy on economic activity. First, asymmetric adjustment is captured in three macroeconomic relationships for investment, the consumer price de£ator, 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 shockömeasured by a change in interest ratesöa¡ects output and in£ation 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 signi¢cantly larger e¡ects on in£ation when the economy is close to capacity compared with when it is in recession. These e¡ects 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. " IntroductionEmpirical research into the linkages between money and output has always been sharply divided between structural form and reduced form approaches. Early structural models were heavily in£uenced by Keynesian macroeconomic theory and, on the whole, tended to produce results favourable to Keynesian ideas. That is, the e¡ects of money on real output were present but relatively modest compared with the e¡ects of changes in autonomous expenditures. The reduced form approach developed out of monetarist attempts to counter the Keynesian dominance of empirical research. Such methods have the advantage of being much easier and cheaper to compute and, from the monetarist point of view, the important