Asymmetric and non-linear real effects of monetary policy shocks

Abstract

Recent literature highlights that the real effects of monetary policy are asymmetric and non-linear. This work will present that the direction, the magnitude, and the timing of interventions can yield varying outcomes depending on several factors, including the state of the business cycle, the size of the initial shock, and broader structural changes in financial markets. Rigidities in prices and wages, which make them more resistant to upward than downward adjustments, with the presence of menu costs, make small negative policy shocks more impactful than large positive ones. This inconsistency challenges the traditional understanding of monetary transmission mechanisms and weakens confidence in the effectiveness of policy actions. Additionally, the review will explore an alternative proposition which will give the conclusion that the development of financial technologies may delay and reduce the responsiveness of production to monetary policy changes, further complicating the transmission mechanism.