This paper estimates a threshold monetary policy rule model for the USA, UK and Japan to investigate if monetary policy changes depend on business cycle conditions, i.e. recessions and expansions of the economy. Then, the paper evaluates the policy implications of this monetary policy rule. Using a long span of data, the paper provides clear-cut evidence that, while during expansions the monetary authorities of the above countries follow the Taylor rule, during recessions they tend to abandon this policy rule and follow a passive monetary policy focused on interest rate smoothing over time. As shown in the paper, this passive monetary policy can not dampen the volatility effects of negative demand or supply macroeconomic shocks on the economy.

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This paper provides clear-cut evidence that the ECB follows an asymmetric monetary policy rule concerned more with inflation rather than sustaining economic growth. The driving force of interest rate cuts is the fall of the inflation rate below its target level. The paper evaluates the implications of the above policy on real activity by simulating a small New Keynesian model. This clearly indicates that the reaction of the ECB to negative output deviations and/or to financial stress conditions in the low inflation regime fails to reduce the adverse effects of negative demand and financial sector shocks on economic activity.

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