Estimated thresholds in the response of output to monetary policy: Are large policy changes less effective?

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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.

Original languageEnglish (US)
Pages (from-to)41-64
Number of pages24
JournalMacroeconomic Dynamics
Issue number1
StatePublished - Jan 2014

Bibliographical note

Funding Information:
I am very thankful to James Morley for valuable insights and suggestions. Helpful comments from two anonymous referees, Steven Fazzari, Kyu Ho Kang, Rody Manuelli, Werner Ploberger, Mark Vaughan, and the participants at the Applied Time-Series Research Group at Washington University, the 3rd Annual Graduate Student Conference at Washington University, the 45th Annual Meeting of the Missouri Valley Economic Association, the 9th Annual Missouri Economic Conference, the 2009 Far East and South Asian Meeting of the Econometric Society, the 2009 Latin American Meeting of the Econometric Society, and the 2009 meeting of the Latin American and Caribbean Economic Association are gratefully acknowledged. I also thank the Center for Research in Economics and Strategy (CRES), in the Olin Business School, Washington University in St. Louis, for financial support. All remaining errors are my own.


  • Asymmetry
  • Monetary Policy
  • Regime Switching
  • Threshold Autoregressions
  • Unobserved Components Model


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