Loss aversion and the asymmetric transmission of monetary policy
Gaffeo,E. Petrella,I. Pfajfar,D. Santoro,E.
Gaffeo,E.
Petrella,I.
Pfajfar,D.
Santoro,E.
Abstract
There is widespread evidence that monetary policy exerts asymmetric effects on output over contractions and expansions in economic activity, while price responses display no sizeable asymmetry. To rationalize these facts we develop a dynamic general equilibrium model where households’ utility depends on consumption deviations from a reference level below which loss aversion is displayed. State-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption generate competing effects on output and inflation. Contractions face the Central Bank with higher responsiveness of output to interest rate changes, as well as a flatter aggregate supply schedule.
Description
Date
2014-11
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
Organizational Units
Journal Issue
Keywords
asymmetry, monetary policy, business cycle, prospect theory, SDG 17 - Partnerships for the Goals
Citation
Gaffeo, E, Petrella, I, Pfajfar, D & Santoro, E 2014, 'Loss aversion and the asymmetric transmission of monetary policy', Journal of Monetary Economics, vol. 68, pp. 19-36. https://doi.org/10.1016/j.jmoneco.2014.07.009
License
info:eu-repo/semantics/restrictedAccess