Should models of monetary policy asymmetry include interaction terms?

Abstract

This paper investigates whether the response of U.S. output to a monetary policy shock is symmetric to the direction of the shock, the size of the shock, and the phase of the business cycle. Many papers in this literature use models that contain only one type of asymmetry; however, looking at individual types of asymmetry may not be enough, and interactions between the asymmetries may be important. My results show that business cycle and directional asymmetry are important and that stimulative monetary policy shocks taken during recessions have little effect on output. This result is missed in models that do not consider multiple types of asymmetry and their interactions.