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, Ball and Romer, 1990, and Ball and Mankiw, 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 hav-ing 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 T his paper tests for the presence of asymmet-ric 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 condi-tions 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