Asymmetric Effects of Monetary Policy in the United States

implied by models with menu costs (see, among others, Ball and Romer, 1990, and Ball and Mankiw, 1994). In static (deterministic) settings, standard menu-cost models imply that “big” monetary policy shocks are neutral because firms would find it optimal to adjust nominal prices, while “small” monetary policy shocks would have real effects because keeping nominal prices fixed is associated with only a second-order cost. In other words, the firms have to decide—before the monetary policy shock is observed—whether to index their prices (at the cost of paying the menu cost) or not. Firms will choose indexation (which implies neutrality) only if the variance of monetary policy shocks is high. We extend the analysis by assuming that the monetary policy process can change between having a “high” variance and a “low” variance. This approach allows for identifying periods of neutrality and periods of non-neutrality. Finally, we consider the case in which only small Asymmetric Effects of Monetary Policy in the United States