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Loss aversion and the asymmetric transmission of monetary policy

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This paper developed a dynamic general equilibrium model where households' utility depends on consumption deviations from a reference level below which loss aversion is displayed, where state-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption generate competing effects on output and inflation.
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This article is published in Journal of Monetary Economics.The article was published on 2014-11-01 and is currently open access. It has received 33 citations till now. The article focuses on the topics: Elasticity of intertemporal substitution & Monetary policy.

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The effects of global excess liquidity on emerging stock market returns: Evidence from a panel threshold model☆

TL;DR: In this article, the authors examined the impact of global excess liquidity on asset prices for a set of seventeen emerging market countries taking into account nonlinearity by using a panel threshold model.
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Transmission of monetary policy in times of high household debt

TL;DR: In this paper, the authors explored whether the degree of household indebtedness can affect the effectiveness of monetary policy and found that monetary policy has a relatively larger impact in countries with a higher share of adjustable-rate loans.
Journal ArticleDOI

Monetary policy shocks from the consumer perspective

TL;DR: The authors applied a latent factor model to survey expectations data on economic conditions, unemployment, family finances, and readiness to spend, and found that, following a monetary policy shock, consumer expectations adjust in the direction predicted by standard models.
Journal ArticleDOI

Unemployment expectations: A socio-demographic analysis of the effect of news

TL;DR: In this paper, the effect of news on consumer unemployment expectations for sixteen socio-demographic groups was evaluated by means of genetic programming, where symbolic regressions that link unemployment rates in the Euro Area to qualitative expectations about a wide range of economic variables.
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Asymmetric inflation expectations, downward rigidity of wages, and asymmetric business cycles

TL;DR: The authors microfound asymmetric household expectations using ambiguity-aversion: households, who do not know the quality of their information, overweight inflationary news and underweight deflationary news since it increases their purchasing power, and showed that monetary policy has asymmetric effects on employment, output and wage inflation in ways consistent with the data.
References
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Book ChapterDOI

Prospect theory: an analysis of decision under risk

TL;DR: In this paper, the authors present a critique of expected utility theory as a descriptive model of decision making under risk, and develop an alternative model, called prospect theory, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.
Journal ArticleDOI

Advances in prospect theory: cumulative representation of uncertainty

TL;DR: Cumulative prospect theory as discussed by the authors applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses, and two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting function.
Journal ArticleDOI

A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle.

James D. Hamilton
- 01 Mar 1989 - 
TL;DR: In this article, the parameters of an autoregression are viewed as the outcome of a discrete-state Markov process, and an algorithm for drawing such probabilistic inference in the form of a nonlinear iterative filter is presented.
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Frequently Asked Questions (12)
Q1. What are the contributions in this paper?

Copyright and reuse: The Warwick Research Archive Portal ( WRAP ) makes this work by researchers of the University of Warwick available open access under the following conditions. Copyright © and all moral rights to the version of the paper presented here belong to the individual author ( s ) and/or other copyright owners. 

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. 

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. 

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). 

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. 

the state-dependent marginal rate of substitution between consumption and leisure dampens the impact of real activity on firms’price-setting behavior during contractions. 

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. 

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. 

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. 

unexpected monetary contractions have greater effects on output, as compared with the impact induced by positive shocks of the same absolute size. 

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. 

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.