Estimated thresholds in the response of output to monetary policy: Are large policy changes less effective?

Luiggi Donayre

doi:10.1017/S1365100513000278

Estimated thresholds in the response of output to monetary policy: Are large policy changes less effective?

Luiggi Donayre

Economics (Duluth)

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6 Scopus citations

Abstract

This paper investigates the potential sources of the mixed evidence found in the empirical literature studying asymmetries in the response of output to monetary policy shocks of different magnitudes. Further, it argues that such mixed evidence is a consequence of the exogenous imposition of the threshold that classifies monetary shocks as small or large. To address this issue, I propose an unobserved-components model of output, augmented by a monetary policy variable, which allows the threshold to be endogenously estimated. The results show strong statistical evidence that the effect of monetary policy on output varies disproportionately with the size of the monetary shock once the threshold is estimated. Meanwhile, the estimates of the model are consistent with a key implication of menu-cost models: smaller monetary shocks trigger a larger response on output.

Original language	English (US)
Pages (from-to)	41-64
Number of pages	24
Journal	Macroeconomic Dynamics
Volume	18
Issue number	1
DOIs	https://doi.org/10.1017/S1365100513000278
State	Published - Jan 2014

Bibliographical note

Funding Information:
I am very thankful to James Morley for valuable insights and suggestions. Helpful comments from two anonymous referees, Steven Fazzari, Kyu Ho Kang, Rody Manuelli, Werner Ploberger, Mark Vaughan, and the participants at the Applied Time-Series Research Group at Washington University, the 3rd Annual Graduate Student Conference at Washington University, the 45th Annual Meeting of the Missouri Valley Economic Association, the 9th Annual Missouri Economic Conference, the 2009 Far East and South Asian Meeting of the Econometric Society, the 2009 Latin American Meeting of the Econometric Society, and the 2009 meeting of the Latin American and Caribbean Economic Association are gratefully acknowledged. I also thank the Center for Research in Economics and Strategy (CRES), in the Olin Business School, Washington University in St. Louis, for financial support. All remaining errors are my own.

Keywords

Asymmetry
Monetary Policy
Regime Switching
Threshold Autoregressions
Unobserved Components Model

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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abstract = "This paper investigates the potential sources of the mixed evidence found in the empirical literature studying asymmetries in the response of output to monetary policy shocks of different magnitudes. Further, it argues that such mixed evidence is a consequence of the exogenous imposition of the threshold that classifies monetary shocks as small or large. To address this issue, I propose an unobserved-components model of output, augmented by a monetary policy variable, which allows the threshold to be endogenously estimated. The results show strong statistical evidence that the effect of monetary policy on output varies disproportionately with the size of the monetary shock once the threshold is estimated. Meanwhile, the estimates of the model are consistent with a key implication of menu-cost models: smaller monetary shocks trigger a larger response on output.",

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Estimated thresholds in the response of output to monetary policy: Are large policy changes less effective?

Abstract

Bibliographical note

Keywords

UN SDGs

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