Are the Effects of Monetary Policy Asymmetric? The Case of Taiwan

Abstract

This article examines Taiwan data to determine whether or not output asymmetrically responds to monetary policy shocks. Two asymmetries are defined. For the first asymmetric effect, referred to as the TE effect, an inverted L-shaped aggregate supply curve with negative-sloped equilibrium locus is proposed. This AS curve implies that the effect of an easy monetary policy differs in different inflation regimes. The easy monetary policy is expected to have a positive effect, no effect, and a negative effect on output during low, high, and very high inflation regimes, respectively. Our results support this hypothesis. Results regarding the second asymmetric effect, referred to as RE asymmetry, are contradictory. Different classifications of recessions yield contradictory results. By employing official classification, monetary policy shocks support the RE asymmetric hypothesis. The data, however, are not overwhelmingly in favor of the RE asymmetric hypothesis using Markov switching dating. Because the dates of recessions are markedly different for the two classifications, the results demand a more in-depth probe into business cycle dating.