Asymmetric Monetary Policy Rules for the Euro Area and the Us

39 Pages Posted: 14 Sep 2021 Last revised: 18 Nov 2021

See all articles by Junior Maih

Junior Maih

Norges Bank

Falk Mazelis

European Central Bank (ECB)

Roberto Motto

European Central Bank (ECB)

Annukka Ristiniemi

European Central Bank (ECB)

Date Written: September, 2021

Abstract

We analyse the implications of asymmetric monetary policy rules by estimating Markov-switching DSGE models for the euro area (EA) and the US. The estimations show that until mid-2014 the ECB’s response to inflation was more forceful when inflation was above 2% than below 2%. Since then, the ECB’s policy can be characterised as symmetric, and we quantify the macroeconomic implications of this policy change. We uncover asymmetries also in the Fed’s policy, which has responded more strongly in times of crisis. We compute an optimal simple rule for the EA and the US in an environment with the effective lower bound and a low neutral real rate, and find that it prescribes a stronger response to inflation and the output gap when inflation is below target compared to when it is above target. We document its stabilisation properties had this optimal rule been implemented over the last two decades.

Keywords: Bayesian Estimation, effective lower bound, Inflation targeting, Markov-switching DSGE, optimal monetary policy

JEL Classification: E52, E58, E31, E32

Suggested Citation

Maih, Junior and Mazelis, Falk and Motto, Roberto and Ristiniemi, Annukka, Asymmetric Monetary Policy Rules for the Euro Area and the Us (September, 2021). ECB Working Paper No. 20212587, Available at SSRN: https://ssrn.com/abstract=3921485 or http://dx.doi.org/10.2139/ssrn.3921485

Junior Maih (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Falk Mazelis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Roberto Motto

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany

Annukka Ristiniemi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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