Asymmetric Effects of Monetary Policy in the United States

Abstract

We also consider asymmetric effects that are implied by models with menu costs (see, among others, Romer, 1990, andMankiw, 1994). In static (deterministic) settings, standard menu-cost models imply that "big" monetary policy shocks are neutral because firms would find it optimal to adjust nominal prices, while "small" monetary policy shocks would have real effects because keeping nominal prices fixed is associated with only a second-order cost. In other words, the firms have to decide-before the monetary policy shock is observed-whether to index their prices (at the cost of paying the menu cost) or not. Firms will choose indexation (which implies neutrality) only if the variance of monetary policy shocks is high. We extend the analysis by assuming that the monetary policy process can change between having a "high" variance and a "low" variance. This approach allows for identifying periods of neutrality and periods of non-neutrality.Finally, we consider the case in which only small Asymmetric Effects of Monetary Policy in the United StatesMorten O. Ravn and Martin Sola T his paper tests for the presence of asymmetric effects of monetary policy on aggregate activity using U.S. postwar quarterly data. We are interested in three types of asymmetry: (i) whether negative and positive monetary policy shocks have different effects on output; (ii) whether big or small shocks have different effects; and/or (iii) whether low-variance, negative shocks have asymmetric effects on output. We discuss the three possibilities below and explain under which conditions these asymmetries might take place. 1 To date, the empirical literature has focused on a particular asymmetry that we call "the traditional Keynesian asymmetry," which states that positive monetary policy shocks have smaller real effects than negative monetary policy shocks-or, in a more extreme form, that only the latter shocks have real effects. This asymmetry can be derived under the assumption of either downward (upward) sticky (flexible) nominal wages or sticky prices together with rationing of demand. 2,3 S E P T E M B E R / O C TO B E R 2 0 0 4 4 1 1 Other types of asymmetric effects have been explored by Garcia and Schaller (1995), who examine whether monetary policy affects output differently in different phases of the business cycle, and Ravn and Sola (1997), who look at the effects of monetary policy on transitional dynamics. Hooker and Knetter (1996) analyze whether military procurement spending has asymmetric effects on employment, and they find that "big" negative shocks to procurement have proportionally larger effects on employment growth than large positive shocks or small shocks to procurement. Hooker (1996) examines whether there are asymmetries in the relationship between oil-price shocks and U.S. macroeconomic variables. He finds that the asymmetric effects in this relationship are fragile. Here we focus on the relationship between monetary policy shocks and aggregate activity. Lo and Piger (2003) examine regime switching in the response of U.S....

A theory of price adjustment under loss aversion

“…This asymmetry -which is also predicted by our model (as shown below) -is further documented by a large body of empirical literature that explicitly focuses on output. For example, DeLong andSummers (1988), Cover (1992), Thoma (1994), and Ravn and Sola (2004) show for the United States that positive changes in the rate of money growth induce much weaker output reductions than negative changes in the rate of money supply. Morgan (1993) and Ravn and Sola (2004) confirm this asymmetry, when monetary policy is conducted via changes in the federal funds rate.…”

“…For example, DeLong andSummers (1988), Cover (1992), Thoma (1994), and Ravn and Sola (2004) show for the United States that positive changes in the rate of money growth induce much weaker output reductions than negative changes in the rate of money supply. Morgan (1993) and Ravn and Sola (2004) confirm this asymmetry, when monetary policy is conducted via changes in the federal funds rate. Additional evidence is provided by Tan et al (2010) for Indonesia, Malaysia, the Philippines, and Thailand and by Mehrara and Karsalari (2011) for Iran.…”

Endogenous Monetary Policy Regime Change

“…The second feature connects to a growing body of empirical evidence suggests that typical macroeconomic shocks-such as oil prices, government spending, or nominal aggregate demand-have nonlinear effects on the economy [for example, DeLong and Summers (1988), Cover (1992), Hooker and Knetter (1996), Hooker (2002), Ravn and Sola (2004), Choi and Devereux (2005), Cologni and Manera (2006)]. Some asymmetric effects have been attributed to nonlinearities in the structure of the economy, 2 Some work examines one-time, permanent endogenous regime changes [for example, Sims (1997), Daniel (2003), and Mackowiak (2006)].…”

The Response of U.S. States to Exogenous Oil Supply and Monetary Policy Shocks

“…Several studies, including Weise (1999), Ravn and Sola (2004), have found that the response of output (and hence income) is asymmetric in monetary expansions and contractions. Rothman (1991), and Skalin and Terrasvirta (2002) have documented asymmetries in U.S. ISSN 1948-5433 2013 unemployment rates, while Rahman and Serletis (2010) find that oil price shocks have asymmetric effects on macroeconomic variables.…”