INFLATION AND THE ASYMMETRIC EFFECTS OF MONEY ON OUTPUT FLUCTUATIONS

This paper examines postwar U.S. data and tests tile implications of B all and Mankiw's (1994) model of asymmetric price adjustment that mone tary shocks have asymmetric effects on output and that the degree of a symmetry is positively related to movements in average inflation. The empirical analysis extends Cover's (1992) framework to allow the degre e of assymetry to depend on an expected inflation series generated fro m Hamilton's (1989) Markov snitching model. The results indicate that monetary shocks display asymmetric effects which are exacerbated by in creases in average inflation and that negative monetary shocks have a larger absolute impact on output.