How much do we understand about asymmetric effects of monetary policy?

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  • March 21, 2019
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  • Sripinit, Teerawut
    • Affiliation: College of Arts and Sciences, Department of Economics
Abstract
  • Whether monetary policy has symmetric effects on economy has been discussed for decades. Particularly, the evidences of the asymmetric effects are sparse and depend on the econometric technique used. Three possible causes of asymmetry have been predominant including a convex supply curve, a credit market imperfection, and a change in economic outlook. However, the proposed theories are either analyzed in a partial equilibrium framework or a linearized general equilibrium framework making the mechanism by which the asymmetric effects are created remain unclear. This study examines the asymmetric effects of monetary policy in a new Keynesian dynamic stochastic general equilibrium model. Among the three groups of theories, this study considers a role of a convex supply curve and a credit market imperfection. The Calvo (1983) pricing mechanism and Bernanke et al. (1998)'s financial accelerator model are devised to create a convex supply curve and financial friction, respectively. The second-order perturbation method is then employed to find the solutions and to preserve the nonlinearity of the model. Three types of asymmetric effects of monetary policy are examined: 1) expansionary versus contractionary policies; 2) moderate versus aggressive policies; and 3) policies implemented in recessions versus ones implemented in expansions. The simulation exercise using either the first-order perturbation method or a linearization does not exhibit any asymmetric effects. When the solutions are obtained by the second- order perturbation method with a certain range of parameter values, the model shows a potential to account for asymmetric effects of monetary policy and conveys that the major source of the asymmetric effects comes from the convex supply curve. However, when the model parameters are calibrated to the U.S. economy, the resultant asymmetric effects are not observed in general. The only noticeable asymmetry is the difference between the effects of the policy implemented at busts and ones at booms. In addition, the degree of the asymmetry is minimal. The model is then estimated by using indirect inference estimator. Similar to those of the model using the calibrated parameters, the results show that the asymmetric effects of monetary policy are not found in general.
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  • ... in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Department of Economics.
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  • Froyen, Richard T.
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