Asymmetric and non-linear real effects of monetary policy shocks

Abstract

It goes without saying that money holds a core position in our economies since the beginning of humanity. Yet, despite its crucial position, if not properly taken care of, money can become detrimental. Central banks and the implementation of monetary policies hence fall into place and have an important role to play by helping to canalise this money and its impacts on economies. Central banks all over the world work with some clear objectives to maintain stability of prices, foster growth and maintain confidence of agents towards money. When one of these objectives is threatened, central banks can, implement policies in order to enable the economy to go back to a convenient level. These monetary policies which can be expansionary or contractionary are transmitted through several channels to impact economic variables and the economy as a whole. Once implemented, do these policies actually influence economic variables? In the first part of this paper, we are going to highlight Fisher and Milton Friedman’s theories of money to show that monetary policies have real effects on economic variables. Through the analysis of the narrative approach conducted by David Romer and Christina Romer(1989) we will realise that from their results, on data before, during and after the world wars money actually portrays real effects on economic variables as suggested by monetarists. That been proven, we show in the second part of our paper that the real effects produced by monetary policies are asymmetric depending on the type of shock implemented, the business cycle the economy finds itself in, the degree of shock, the nature of the economic variable to be impact. The VAR and MSM models developed by Peersman and Smets(2001) in their paper, the local projection methodology used by Alpanda and Al (2016) or the Gaussian basis function approach by Regis Barnichon and Matthes(2016) we develop give striking results that monetary policies do have asymmetric effects but what differs in these studies, is the direction of the asymmetry. After carrying out a VAR on the US between two periods, we could easily conclude that contractionary monetary policies display different effects on our economies than loose policies and also during a recession, economic variables react differently to monetary policies than during an expansion. Showing that, we can suggest that the main question should not be “do monetary policies have asymmetric effects?” but becomes “in which direction will this asymmetries go?