Loss Aversion and the Asymmetric Transmission of Monetary Policy

TY - JOUR

T1 - Loss Aversion and the Asymmetric Transmission of Monetary Policy

AU - Santoro, Emiliano

AU - Petrella, Ivan

AU - Pfajfar, Damjan

AU - Gaffeo, Edoardo

PY - 2014

Y1 - 2014

N2 - 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.

AB - 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.

U2 - 10.1016/j.jmoneco.2014.07.009

DO - 10.1016/j.jmoneco.2014.07.009

M3 - Journal article

SN - 0304-3932

VL - 68

SP - 19

EP - 36

JO - Journal of Monetary Economics

JF - Journal of Monetary Economics

ER -