Research Seminar - Davide Debortoli (Universitat Pompeu Fabra) - The Effects of Monetary Policy Easing and Tightening: An Asymmetric Sacrifice Ratio

Research seminars

Research Seminar - Davide Debortoli (Universitat Pompeu Fabra, CREi, BGSE and CEPR) - The Effects of Monetary Policy Easing and Tightening: An Asymmetric Sacrifice Ratio

Co-authors: Mario Forni, Luca Gambetti and Luca Sala

Abstract:
We use a Nonlinear proxy-SVAR approach to provide a new measure of the central bank output-inflation trade-off, i.e. the sacrifice ratio, which does not rely on a specific Phillips curve model. We investigate the effects of monetary easing and tightening, and show that boosting inflation delivers small benefits in terms of output ---a small or insignificant sacrifice ratio. Reducing inflation is instead associated with large output losses. We use a simple model with downward nominal wage rigidity to rationalize our empirical findings, and to perform a Monte-Carlo simulation to assess the validity of the econometric procedure. Overall, our results suggest that monetary accommodations are less powerful, and monetary contractions are less costly than implied by a (nearly) flat Phillips curve.

 

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