Is the Response of Output to Monetary Policy Asymmetric? Evidence from a Regime-Switching Coefficients Model

Abstract

This paper investigates regime switching in the response of U.S. output to a monetary policy action. We find substantial, statistically significant, time variation in this response, and that this time variation corresponds to "high response" and "low response" regimes. We then investigate whether the timing of the regime shifts are consistent with three particular manifestations of asymmetry by modeling the transition probabilities governing the switching process as a function of state variables. We find strong evidence that the regime shifts can be explained by whether the economy is in a recession at the time the policy action was taken. In particular, policy actions taken during recessions seem to have larger effects than those taken during expansions. We find much less evidence of any asymmetry related to the direction or size of the policy action.

State‐Dependent Transmission of Monetary Policy in the Euro Area

“…Both findings provide a strong indication that the transmission mechanism is indeed different for the euro area during times of economic and financial distress. In line with Weise (), Garcia and Schaller (), Lo and Piger (), Neuenkirch (), and Jannsen, Potjagailo, and Wolters (), we find a stronger reaction during the acute phase of the financial crisis and during recessions.…”

“…A related branch of the literature deals with the asymmetric effects of monetary policy during the “regular” business cycle. For instance, Weise (), Garcia and Schaller (), and Lo and Piger () find that monetary policy is more effective during recessions than during expansions…”

“…A related branch of the literature deals with the asymmetric effects of monetary policy during the "regular" business cycle. For instance, Weise (1999), Garcia and Schaller (2002), and Lo and Piger (2005) find that monetary policy is more effective during recessions than during expansions. 1 In all of these studies, monetary policy is examined either in a linear or in a regime-switching vector autoregressive (VAR) model.…”

Household Debt Overhang and Transmission of Monetary Policy

“…In the earlier literature, the state dependence of the effectiveness of monetary policy has been studied mostly in the context of recessionary versus expansionary periods. See, for instance, Weise (), Lo and Piger (), and Tenreyro and Thwaites () . In contrast, we focus on the state of household debt to capture the potential nonlinearity in the responses to monetary policy shocks.…”

“…In the earlier literature, the state dependence of the effectiveness of monetary policy has been studied mostly in the context of recessionary versus expansionary periods. See, for instance, Weise (1999), Lo and Piger (2005), and Tenreyro and 1. Note that the home equity loan channel directly affects new borrowing or the flow of debt, unlike the interest rate channel that primarily affects the stock of preexisting debt (at least when loans are adjustable rate or refinancing is allowed for fixed-rate loans).…”