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Is the response of output to monetary policy asymmetric? evidence from a regime-switching coefficients model

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Ming Chien Lo
Jeremy Piger

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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. (Formerly titled: "When Does Monetary Policy Matter? Evidence from an Unobserved Components Model with regime Switching")

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2001-022.

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Date of creation: 2003
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Publication status: Published in Journal of Money, Credit, and Banking, October 2005, 37(5), pp. 865-87
Handle: RePEc:fip:fedlwp:2001-022

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Keywords: Monetary policy ; Business cycles;

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  1. Karras, Georgios, 1996. "Why are the effects of money-supply shocks asymmetric? Convex aggregate supply or "pushing on a string"?," Journal of Macroeconomics, Elsevier, vol. 18(4), pages 605-619. [Downloadable!] (restricted)
  2. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 869-902, August. [Downloadable!] (restricted)
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  3. J. Bradford DeLong & Lawrence H. Summers, 1988. "How Does Macroeconomic Policy Affect Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1988-2), pages 433-494. [Downloadable!]
  4. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S61-82, Suppl. De. [Downloadable!] (restricted)
  5. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 797-814, November. [Downloadable!] (restricted)
  6. Mark Gertler & Cara S. Lown, 2000. "The Information in the High Yield Bond Spread for the Business Cycle: Evidence and Some Implications," NBER Working Papers 7549, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Cover, James Peery, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1261-82, November. [Downloadable!] (restricted)
  8. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March. [Downloadable!] (restricted)
  9. repec:fth:harver:1418 is not listed on IDEAS
  10. J. Bradford De Long & Lawrence H. Summers, . "How Does Macroeconomic Policy Matter?," J. Bradford De Long's Working Papers _130, University of California at Berkeley, Economics Department. [Downloadable!]
  11. Garcia, Rene, 1998. "Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 763-88, August.
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  12. Gerlach, Stefan & Smets, Frank, 1999. "Output gaps and monetary policy in the EMU area1," European Economic Review, Elsevier, vol. 43(4-6), pages 801-812, April. [Downloadable!] (restricted)
  13. Laurence Ball & N. Gregory Mankiw, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," NBER Working Papers 4089, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Evans, Paul, 1986. "Does the potency of monetary policy vary with capacity utilization?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 24(1), pages 303-331, January. [Downloadable!] (restricted)
  15. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  16. Belongia, Michael T, 1996. "Measurement Matters: Recent Results from Monetary Economics Reexamined," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1065-83, October. [Downloadable!] (restricted)
  17. Friedman, Milton, 1993. "The "Plucking Model" of Business Fluctuations Revisited," Economic Inquiry, Oxford University Press, vol. 31(2), pages 171-77, April.
  18. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
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  1. Christian Melzer & Thorsten Neumann, 2005. "Changing Effects of Monetary Policy in the U.S. –Evidence from a Time-Varying Coefficient VAR," Computing in Economics and Finance 2005 144, Society for Computational Economics. [Downloadable!]
  2. Dimitris K. Christopoulos & Miguel Leon-Ledesma, 2008. "Testing for Granger (non)-Causality in a Time Varying Coefficient VAR Model," Studies in Economics 0802, Department of Economics, University of Kent. [Downloadable!]
    Other versions:
  3. Shyh-Wei Chen & Chung-Hua Shen & Zixiong Xie, 2006. "Nonlinear relationship between inflation and inflation uncertainty in Taiwan," Applied Economics Letters, Taylor and Francis Journals, vol. 13(8), pages 529-533, June. [Downloadable!] (restricted)
  4. Ugo Panizza & Valerie Cerra & Sweta Chaman Saxena, 2009. "International Evidence on Recovery from Recessions," IMF Working Papers 09/183, International Monetary Fund. [Downloadable!]
  5. Babutsidze, Zakaria, 2006. "(S,s) Pricing: Does the Heterogeneity Wipe Out the Asymmetry on Micro Level?," UNU-MERIT Working Paper Series 033, United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology. [Downloadable!]
  6. Vladimir Kuzin & Silke Tober, 2004. "Asymmetric Monetary Policy Effects in Germany," Discussion Papers of DIW Berlin 397, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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