Asymmetric effects of monetary policy in the US: Positive vs. negative or big vs. small?

This paper reconsiders the empirical evidence on the asymmetric output effects of monetary policy. Asymmetric effects is a common feature of many theoretical models, and there are many different versions of such asymmetries. We concentrate on the distinctions between positive and negative money-supply changes, big and small changes in money-supply, and possible combinations of the two asymmetries. Earlier research has found empirical evidence in favor of the former of these in US data. Using M1 as the monetary variable we find evidence in favor of neutrality of big shocks and non-neutrality of small shocks. The results may, however, be affected by structual instability of M1 demand. Thus, we substitute M1 with the federal funds rate. In these data we find that only small negative shocks affect real aggregate activity. The results are interpreted in terms of menu-cost models.