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ESTIMATED THRESHOLDS IN THE RESPONSE OF OUTPUT TO MONETARY POLICY: ARE LARGE POLICY CHANGES LESS EFFECTIVE?

Published online by Cambridge University Press:  03 July 2013

Luiggi Donayre
Luiggi Donayre*
Affiliation:
University of Minnesota–Duluth
*
Address correspondence to: Luiggi Donayre, Department of Economics, University of Minnesota–Duluth, 1318 Kirby Drive, Duluth, MN 55812, USA; e-mail: adonayre@d.umn.edu.
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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.

Keywords

AsymmetryMonetary PolicyRegime SwitchingThreshold AutoregressionsUnobserved Components Model
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 1 , January 2014 , pp. 41 - 64
Copyright
Copyright © Cambridge University Press 2013 

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