The asymmetric effects of monetary policy: Some results from a macroeconometric model

This paper offers evidence of the asymmetric effect of monetary policy on e conomic activity. First, asymmetric adjustment is captured in three macroec onomic relationships for investment, the consumer price deflator, inventori es and house prices. These relationships are then embedded in a small macro econometric model of the UK economy. Simulations on this model allow us to trace through the interactions of these asymmetries so that a monetary shoc k-measured by a change in interest rates-affects output and inflation in th e short run in ways dependent both upon the sign of the shock and the initi al state of the economy. A monetary easing has significantly larger effects on inflation when the economy is close to capacity compared with when it i s in recession. These effects are captured by intrinsic asymmetries in the model, due to the use of the logarithm of interest rates and the logarithm of unemployment in the wage equation, as well as the asymmetries coming fro m the non-linearities which we have introduced explicitly.