Asymmetries in Monetary Policy

Benigno, Pierpaolo; Rossi, Lorenza (2021). Asymmetries in Monetary Policy. European economic review, 140, p. 103945. Elsevier 10.1016/j.euroecorev.2021.103945

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Nonlinearities embedded in the standard New-Keynesian model show that a welfare-maximizingpolicymaker should behave in line with a contractionary bias, fearing more expansions inoutput and inflation rather than contractions. On the contrary, the aggregate-supply equationimplies that any upward pressure coming from real marginal costs does not necessarily push upinflation. Once these two forces are combined in the optimal policy, an overall expansionarybias emerges. The nonlinearities of the AS equation combined with changes in volatility can beresponsible for a flattening in the estimated linear Phillips curve.

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