Is the Response of Output to Monetary Policy Asymmetric? Evidence from a Regime-Switching Coefficients Model

FRB of St. Louis Working Paper No. 2001-022A

33 Pages Posted: 13 Mar 2002

See all articles by Jeremy Piger

Jeremy Piger

University of Oregon - Department of Economics

Ming Chien Lo

Saint Cloud State University - Department of Economics

Date Written: April 2002

Abstract

This paper adopts a general approach to investigate asymmetry in the leading explanatory power of interest-rate-based indicators of monetary policy for U.S. output. The purpose is to provide robust results by utilizing a model that does not pre-specify a particular condition under which asymmetry arises. In particular, we augment an unobserved-components decomposition of real output into permanent and transitory components with monetary policy indicators. Asymmetry is captured by allowing the coefficients on the policy variables to undergo regime switching. This framework produces a latent state variable that documents when policy actions have led output. In a second stage, we use the estimated latent state variable to jointly evaluate the evidence for three specific types of asymmetry. We find that policy actions taken during periods of cyclical downturn in the economy are more likely to lead output than those taken during cyclical expansions. We also find that during periods of cyclical downturn, large policy actions and contractionary policy actions are more likely to lead output than those that are small or expansionary.

Keywords: Asymmetry, Business Cycles, Regime Switching, Monetary Policy

JEL Classification: C32, E32

Suggested Citation

Piger, Jeremy M. and Lo, Ming Chien, Is the Response of Output to Monetary Policy Asymmetric? Evidence from a Regime-Switching Coefficients Model (April 2002). FRB of St. Louis Working Paper No. 2001-022A, Available at SSRN: https://ssrn.com/abstract=302773 or http://dx.doi.org/10.2139/ssrn.302773

Jeremy M. Piger (Contact Author)

University of Oregon - Department of Economics ( email )

Eugene, OR 97403
United States

Ming Chien Lo

Saint Cloud State University - Department of Economics ( email )

720 Fourth Avenue South
St. Cloud, MN 56301-4498
United States
320-308-0143 (Phone)
320-308-2228 (Fax)

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