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Economic Brief

March 2017, EB17-03

Are the Effects of Monetary Policy Asymmetric?
By Regis Barnichon, Christian Matthes, and Tim Sablik

The Federal Reserve uses monetary policy to stimulate the economy when
unemployment is high and to rein in inflationary pressures when the economy is overheating. However, evidence suggests that these policy stances
have unequal effects. Contractionary monetary shocks raise unemployment
more strongly than expansionary shocks lower it.
The Federal Reserve has a “dual mandate” to
maintain stable prices and maximum sustainable employment. It does so primarily by controlling its target interest rate (the federal funds
rate), which influences short-term market rates.
When unemployment is elevated, the Fed loosens monetary policy (lowers its target rate) to
stimulate economic activity and boost output.
When inflation is rising, the Fed tightens policy
(raises its target rate) to slow economic activity
and counteract inflationary pressure.
But are both types of policy responses equally
effective? Since the Great Depression, economists have suspected that tight policy may
have a stronger effect on output than loose
policy because the Fed’s response to the market
crash of 1929 failed to avert the Great Depression. Milton Friedman and Anna Schwartz later
argued in their 1963 book, A Monetary History of
the United States, that this was because the Fed’s
policy stance during the early 1930s actually
was contractionary rather than expansionary,
but other examples have reinforced the view
that expansionary monetary policy may be more
limited than contractionary policy. Most recently,
the Fed was forced to turn to unconventional

EB17-03 - Federal Reserve Bank of Richmond

policies during the Great Recession after reducing its target rate to nearly zero seemed to have
little effect on unemployment.
Monetary policy asymmetry is best described
using a metaphor. Imagine a string with monetary policy at one end and the economy at the
other. Employing tight monetary policy when
inflation is rising is like pulling on the string to
keep the economy in check — it works fairly
well. But attempting to stimulate the economy
with loose policy during a downturn is like trying to push on the string to move the economy
— not very effective.
In addition to monetary changes having asymmetric effects based on their direction, the
strength of monetary policy may also vary with
the state of the economy. Previous tests for monetary policy asymmetries have had somewhat
mixed results, but this Economic Brief presents
new evidence to confirm the asymmetric effects
of monetary policy.
Why Might Monetary Policy Be Asymmetric?
There are several theoretical reasons why monetary policy could have asymmetric effects on

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economic output.1 The first relates to the behavior
of lenders and borrowers under different monetary
conditions. When the Fed raises its policy rates, market rates tend to rise accordingly. One might expect
that banks would simply pass these higher rates on to
their borrowers. While this is true to an extent, raising
loan rates too high could increase the likelihood that
risky borrowers default. As a result, banks may choose
to ration credit during a period of high interest rates,
constraining credit for some consumers and leading
to a bigger decline in output, thus amplifying the
impact of contractionary monetary policy. On the
other hand, expansionary policy will not necessarily
increase borrowing and spending if economic conditions have reduced demand. Unlike tight monetary
policy, it is not a binding constraint on consumers (as
expressed in the old adage, you can lead a horse to
water but you can’t make it drink).
Another reason why expansionary monetary policy
might be less effective than contractionary policy
is because prices seem less likely to adjust downward — that is, they are “sticky.” Firms also may be
reluctant to lower wages for fear of damaging worker
morale. Because of such downward price and wage
rigidity, firms will tend to respond to contractionary monetary policy by reducing output rather than
prices. Prices and wages are less upwardly sticky,
however. Firms are accustomed to raising prices and
wages gradually due to inflation, for example. As a
result, expansionary monetary policy is more likely
to prompt a change in prices rather than output.
Finally, monetary policy may have asymmetric effects
during different points in the business cycle due to
changes in consumer outlook. Similar to the creditconstraint argument, if consumers are pessimistic
about economic conditions, then lowering rates may
not do much to stimulate borrowing and spending.
This explanation is not entirely compelling, however,
since consumer optimism during a boom period
should also weaken the effect of tight monetary
policy. For contractionary policy to have a stronger
effect than expansionary policy, consumers and firms
would have to be more pessimistic during economic
downturns than they are optimistic during booms.
This is certainly possible but perhaps not realistic.

Testing for Asymmetry
If monetary policy does have asymmetric effects on
output, that finding would have important implications for how the Fed conducts policy. Conclusive
evidence one way or the other has proven somewhat elusive, however. A number of studies do find
evidence that contractionary policy has a stronger
effect on output than expansionary policy, as the
theory predicts.2 But other studies find that what
matters is not the direction of the monetary change
but rather its size.3 And still other studies find evidence that the impact of monetary policy depends
chiefly on the state of the economy.4
One problem facing economists trying to find evidence of asymmetry is that the standard models
used for measuring the effects of shocks, such as
changes in monetary policy, have difficulty identifying asymmetric effects. Economists have attempted
to get around this problem in two ways. The first
involves looking at unanticipated increases and
decreases in the money supply and testing whether
these changes have asymmetric effects. One challenge with this approach is correctly identifying
unanticipated monetary shocks. Additionally, while
these models may be able to detect asymmetry
based on the direction of a monetary change,
they struggle to measure other potential causes of
asymmetry. Another approach makes use of regimeswitching models that allow for the impact of one
variable (monetary policy) to depend upon changes
in another variable (the state of the economy). But
while these models can identify whether the effects
of monetary policy change with the business cycle,
they are not able to determine if the effects of contractionary policy are inherently different from
those of expansionary policy.
Two of the authors of this brief, Barnichon and Matthes, have developed an alternative approach for
addressing these issues.5 They start with a model
of the economy in which the behavior of a system
of macroeconomic variables is determined by its
(possibly asymmetric) response to past and present
shocks. They then use Gaussian functions to parameterize the dynamic effects of structural shocks
on the economy. The advantage of this approach

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hand, a 0.7 percentage point decrease in the federal
funds rate produces only a 0.04 percentage point decrease in unemployment — an effect that is not
statistically different from zero. This implies that
contractionary monetary policy has a significantly
stronger effect on unemployment than expansionary policy.

— dubbed Gaussian Mixture Approximation — is
that it uses only a small set of free parameters, which
then allows for a much more efficient estimation of
models with asymmetric responses. In simulations,
Barnichon and Matthes’ approach not only performs
as well as benchmark models in estimating linear or
symmetric responses, it can also detect asymmetric
responses in nonlinear models. Barnichon and Matthes use their new methodology to estimate whether monetary shocks generate asymmetric responses
depending on the direction of the shock as well as
the state of the economy.

Barnichon and Matthes also find some, albeit inconclusive, evidence that prices respond asymmetrically
to monetary changes. Prices appear stickier following monetary contractions than following monetary
expansions. This provides some supporting evidence
for the theory that monetary policy has asymmetric
effects because firms are more reluctant to lower
prices and wages than to raise them.

Results and Implications
Barnichon and Matthes first test whether the direction of a monetary shock alone results in different
economic responses. Applying data from 1959
through 2007 to their model, they find strong evidence of an asymmetric response in unemployment
depending on the direction of the monetary change.
They estimate that an increase in the federal funds
rate of 0.7 percentage points results in an increase in
unemployment of 0.15 percentage points, a larger
effect than the 0.10 percentage points estimated by
a standard linear model.6 (See Figure 1.) On the other

Next, Barnichon and Matthes expand their model
to allow the effects of monetary policy to depend
on both the direction of the change and the state
of the economy. Again, they find that expansionary
monetary policy has a weaker effect on unemployment than contractionary policy. Additionally, they
find that the effect of expansionary policy depends
on the state of the economy. When unemployment

Figure 1: Asymmetric Unemployment Rate Responses to Monetary Policy Changes

Contractionary Monetary Shock

Expansionary Monetary Shock

Expansionary Monetary Shock


Percentage Point Decrease in Unemployment Rate

Percentage Point Decrease in Unemployment

Percentage Point Increase in Unemployment Rate

Percentage Point Increase in Unemployment

Contractionary Monetary Shock





Quarters Since Shock










Quarters Since Shock



Barnichon and Matthes
Standard Linear Model
Barnichon and Matthes
Barnichon and Matthes
Source: Regis Barnichon and
Matthes, “Gaussian Mixture Approximations of Impulse ResponsesStandard
and the Nonlinear
modelEffects of Monetary

Shocks,” Federal Reserve Bank of Richmond Working Paper No. 16-08, June 2016.
Notes: Shaded areas represent margins of error above and below Barnichon and Matthes’ estimates. These areas account for 90 percent of all cases.

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is low, expansionary policy generates a substantial
increase in inflation but little change in unemployment. When unemployment is high, expansionary
monetary policy has little effect on inflation and
some positive effect on employment. This is consistent with standard macroeconomic theory and the
Fed’s experience during the Great Inflation.
The findings from Barnichon and Matthes’ model
have a number of implications for monetary policymakers. They suggest that monetary policy asymmetries may be larger than previous estimates have
found. The Fed’s ability to stimulate the economy
through expansionary policy appears less potent
than the negative effect contractionary policy has
on employment. Additionally, as theory and other
studies have suggested, attempting to use monetary policy to stimulate the economy beyond full
employment is likely to only increase inflation with
no significant reduction in unemployment.
Regis Barnichon is a research advisor at the Federal
Reserve Bank of San Francisco. Christian Matthes is
a senior economist and Tim Sablik is an economics
writer in the Research Department at the Federal
Reserve Bank of Richmond.

 onald P. Morgan, “Asymmetric Effects of Monetary Policy,”
Federal Reserve Bank of Kansas City Economic Review, Second
Quarter 1993, vol. 78, no. 2, pp. 22–33.


For example, see James Peery Cover, “Asymmetric Effects of
Positive and Negative Money-Supply Shocks,” Quarterly Journal
of Economics, November 1992, vol. 107, no. 4, pp. 1261–1282;
and Emiliano Santoro, Ivan Petrella, Damjan Pfajfar, and Edoardo Gaffeo, “Loss Aversion and the Asymmetric Transmission
of Monetary Policy,” Journal of Monetary Economics, November
2014, vol. 68, pp. 19-36. A working paper version is available


F or example, Morten O. Ravn and Martin Sola, “A Reconsideration of the Empirical Evidence on the Asymmetric Effects of
Money-Supply Shocks: Positive vs. Negative or Big vs. Small?”
Birkbeck, University of London, Archive Discussion Paper No.
9606, February 1996.


F or example, see Silvana Tenreyro and Gregory Thwaites,
“Pushing on a String: US Monetary Policy Is Less Powerful in
Recessions,” American Economic Journal: Macroeconomics,
October 2016, vol. 8, no. 4, pp. 43–74. A working paper version is available online. Also, see Ming Chien Lo and Jeremy
Piger, “Is the Response of Output to Monetary Policy Asymmetric? Evidence from a Regime-Switching Coefficients Model,”
Journal of Money, Credit and Banking, October 2005, vol. 37,
no. 5, pp. 865–886. A working paper version is available online.
Also, see Charles L. Weise, “The Asymmetric Effects of Monetary
Policy: A Nonlinear Vector Autoregression Approach,” Journal
of Money, Credit and Banking, February 1999, vol. 31, no. 1,
pp. 85–108.


 egis Barnichon and Christian Matthes, “Gaussian Mixture Approximations of Impulse Responses and the Nonlinear Effects
of Monetary Shocks,” Federal Reserve Bank of Richmond Working Paper No. 16-08, June 2016.


I n this context, “linear” implies symmetry.

This article may be photocopied or reprinted in its
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Views expressed in this article are those of the authors
and not necessarily those of the Federal Reserve Bank
of Richmond, the Federal Reserve Bank of San Francisco,
or the Federal Reserve System.

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