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    Loss aversion and the asymmetric transmission of monetary policy

    Santoro, E. and Petrella, Ivan and Pfajfar, D. and Gaffeo, E. (2014) Loss aversion and the asymmetric transmission of monetary policy. Journal of Monetary Economics 68 , pp. 19-36. ISSN 0304-3932.

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    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.

    Metadata

    Item Type: Article
    Keyword(s) / Subject(s): Asymmetry, Monetary policy, Business cycle, Prospect theory
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 29 Jul 2014 14:53
    Last Modified: 18 Aug 2014 09:16
    URI: http://eprints.bbk.ac.uk/id/eprint/10288

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