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Should Policy Makers Worry about Asymmetries in the Business Cycle?

  • Boldin Michael D.

    (RFA, Inc.)

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    This paper reconsiders the conventional use of econometric models, especially identified vector autoregressive models, in guiding monetary policy. The main question I explore is whether these models are seriously flawed because they ignore asymmetries in the business cycles. Toward that end, models that allow for asymmetric business cyclesÑdefined by the case where recessions and expansions are not mirror images of each otherÑare estimated. The results suggest that policy makers should worry about asymmetries in business cycles because most econometric models cannot capture empirically important asymmetries. In particular, estimated multiregime models show that the effects of monetary policy are stronger during turning points and outright recessions than in expansions. I conclude that the symmetry/asymmetry question has as much, and maybe even more, practical significance than debates over identification assumptions that have influenced much of the empirical macroeconomic literature over the past 20 years.

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    Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

    Volume (Year): 3 (1999)
    Issue (Month): 4 (January)
    Pages: 1-20

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    Handle: RePEc:bpj:sndecm:v:3:y:1999:i:4:n:3
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