Asymmetric Effects of Money Supply Shocks and Trend Inflation

Abstract

This paper considers a possible explanation for the asymmetric effects of money supply shocks. Based on a sticky price theory, I derive the following two predictions: first, the relationship between trend inflation and the degree of asymmetry is not simply monotonic, instead, increases in inflation beyond some level can actually reduce the degree of asymmetry. Secondly, the degree of asymmetry is high in countries where the standard deviation of nominal GDP growth is high. I examine prewar and postwar data for OECD countries and find that the cross-country evidence supports both of these predictions.