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Monetary Policy

In: Asymmetry and Aggregation in the EU

Author

Listed:
  • David G. Mayes
  • Matti Virén

Abstract

Monetary policy is probably the most obvious area of policy where behaviour is likely to be asymmetric or at any rate nonlinear. We can see this from four directions. The first is that since the Phillips curve is nonlinear as set out in Chapter 4, monetary policy acting through the IS curve, Chapter 3, will have a different effect depending on whether the output gap is positive or negative. If the output gap is positive then inflation is quite sensitive to the operation of policy. If the output gap is negative then policy is much less effective. Hence, we can expect that movements in interest rates will be more substantial in the face of the threat of deflation than in the case of excess inflation. Clearly the same applies to any other asymmetries in the operation of the economy, presuming that is that monetary policy is attempting to help hold the economy on a smooth track of low inflation and make a contribution to stable sustainable economic growth. Monetary policy needs to be asymmetric to try to offset some of the asymmetries in the economy.

Suggested Citation

  • David G. Mayes & Matti Virén, 2011. "Monetary Policy," Palgrave Macmillan Books, in: Asymmetry and Aggregation in the EU, chapter 8, pages 174-203, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-30464-2_8
    DOI: 10.1057/9780230304642_8
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