Loss Aversion and the Asymmetric Transmission of Monetary Policy

Ivan Petrella, Damjan Pfajfar, Emiliano Santoro and Edoardo Gaffeo

No 10105, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Asymmetry; Business cycle; Monetary policy; Prospect theory (search for similar items in EconPapers)
JEL-codes: D03 D11 E32 E42 E52 (search for similar items in EconPapers)
Date: 2014-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (79)

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Related works:
Journal Article: Loss aversion and the asymmetric transmission of monetary policy (2014)
Working Paper: Loss Aversion and the Asymmetric Transmission of Monetary Policy (2012)
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