Q2. How does Weise (1999) show that if the economy starts in a low-growth?
Weise (1999) shows that if the economy starts in a low-growth state, large negative shocks induce substantially larger contractionary (on impact) responses in output, though on a longer time horizon no asymmetry can be appreciated with respect to the size of the shock.
Q3. What is the main reason why the economic model predicts stronger output responses in contractions?
A convex aggregate supply retains the property to be steeper for price levels above expected prices (see, e.g., Ball and Mankiw, 1994), so that it ensures a stronger (lower) reaction of output (prices) in contraction.
Q4. What are the main mechanisms that may give rise to asymmetries in the monetary?
4The list of mechanisms that may give rise to asymmetries in the monetary transmission mechanism includes: non-linearities in investment (Bertola and Caballero, 1994), patterns of entry and exit from a given market under uncertainty about profit perspectives (Dixit, 1989), nominal rigidities in the labor and the goods market (Ball and Mankiw, 1994), learning and information aggregation (Chalkley and Lee, 1998), state-dependent pricing and convex aggregate supply (Devereux and Siu, 2007).
Q5. What is the method used to identify the transmission of shocks to the output gap, inflation,?
In order to identify the transmission of these shocks to the output gap, inflation, the real wage and the monetary policy instrument, the projection method proposed by Jorda (2005) is employed.
Q6. What is the effect of the state-dependent marginal rate of substitution on the price-setting behavior?
the state-dependent marginal rate of substitution between consumption and leisure dampens the impact of real activity on firms’price-setting behavior during contractions.
Q7. What is the pervasive form of non-linearity?
According to their empirical analysis, the most pervasive form of non-linearity is represented by the asymmetric transmission of monetary policy over contractions and expansions in the business cycle.
Q8. What is the resulting real marginal cost?
The resulting real marginal cost is Ωt = Wt/Zt. Following Rotemberg (1982), the authors allow for sluggish nominal price adjustment by assuming that firms face a quadratic resource cost for adjusting prices: ϕ 2(Pj,t/Pj,t−1 − 1)2 Yt, ϕ ≥ 0.
Q9. What is the implication of assuming the presence of external habits?
In this respect, a striking implication of assuming the presence of external habits is that not only inflation cannot be stabilized, but it also drops in the face of an adverse shock to technology.
Q10. What is the effect of unexpected monetary contractions on output?
unexpected monetary contractions have greater effects on output, as compared with the impact induced by positive shocks of the same absolute size.
Q11. What is the effect of loss averse preferences on the NKPC?
On a priori grounds the net effect on the policy rate is not unambiguous, as during contractions loss averse preferences induce both a flattening of the NKPC and a stronger consumption externality.
Q12. How can the authors explain the effect of a loose monetary policy?
This can be intuitively explained by the fact that a rise in the nominal rate of interest increases the chances to trigger or deepen contractionary output movements, as compared with a loose monetary stance.