The effects of Monetary Policy easing and tightening: an asymmetric sacrifice ratio

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 imply that monetary accommodations are less powerful, and monetary contractions are less costly than implied by a (nearly) flat Phillips’s curve.

Other authors: M. Forni, L. Gambetti and L. Sala