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Asymmetries in monetary policy

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  • Benigno, Pierpaolo
  • Rossi, Lorenza

Abstract

Nonlinearities embedded in the standard New-Keynesian model show that a welfare-maximizing policymaker should behave in line with a contractionary bias, fearing more expansions in output and inflation rather than contractions. On the contrary, the aggregate-supply equation implies that any upward pressure coming from real marginal costs does not necessarily push up inflation. Once these two forces are combined in the optimal policy, an overall expansionary bias emerges. The nonlinearities of the AS equation combined with changes in volatility can be responsible for a flattening in the estimated linear Phillips curve.

Suggested Citation

  • Benigno, Pierpaolo & Rossi, Lorenza, 2021. "Asymmetries in monetary policy," European Economic Review, Elsevier, vol. 140(C).
    • Handle: RePEc:eee:eecrev:v:140:y:2021:i:c:s0014292121002403
    DOI: 10.1016/j.euroecorev.2021.103945
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    Cited by:

    1. Gross, Isaac & Hansen, James, 2021. "Optimal policy design in nonlinear DSGE models: An n-order accurate approximation," European Economic Review, Elsevier, vol. 140(C).
    2. Maih, Junior & Mazelis, Falk & Motto, Roberto & Ristiniemi, Annukka, 2021. "Asymmetric monetary policy rules for the euro area and the US," Journal of Macroeconomics, Elsevier, vol. 70(C).
    3. De Palma Francesco & Ligonnière Samuel & Saadaoui Jamel & Thommen Yann, 2022. "The role of wage bargaining institutions in the Phillips curve flattening;," Working Papers of BETA 2022-21, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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    Keywords

    Bias in stabilization policy;

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