Nonlinear Monetary Policy Tradeoffs

We measure the inflation-unemployment tradeoff associated with monetary easing and tightening, during booms and recessions, using a novel nonlinear Proxy-SVAR approach.

We measure the inflation-unemployment tradeoff associated with monetary easing and tightening, during booms and recessions, using a novel nonlinear Proxy-SVAR approach. We find evidence of significant nonlinearities for the U.S. economy (1973:M1 - 2019:M6): stimulating economic activity during recessions is associated with minimal costs in terms of inflation, and reducing inflation during booms delivers small costs in terms of unemployment. These results can be rationalized by a simple model with downward nominal wage rigidities, which is also used to assess the validity of our empirical approach.