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

Abstract

This paper investigates regime switching in the response of U.S. output to a monetary policy action. We find substantial, statistically significant, time variation in this response, and that this time variation corresponds to "high response" and "low response" regimes. We then investigate whether the timing of the regime shifts are consistent with three particular manifestations of asymmetry by modeling the transition probabilities governing the switching process as a function of state variables. We find strong evidence that the regime shifts can be explained by whether the economy is in a recession at the time the policy action was taken. In particular, policy actions taken during recessions seem to have larger effects than those taken during expansions. We find much less evidence of any asymmetry related to the direction or size of the policy action.