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Asymmetric Expectation Effects Of Regime Shifts In Monetary Policy

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Executive Summary

This paper addresses two substantive issues: does the magnitude of the expectation effect of regime switching in monetary policy depend on a particular policy regime? Under which regime is the expectation effect quantitatively important? Using two canonical DSGE models, the authors show that there exists asymmetry in the expectation effect across regimes. The expectation effect under the dovish policy regime is quantitatively more important than that under the hawkish regime. These results suggest that the possibility of regime shifts in monetary policy can have important effects on rational agents' expectation formation and on equilibrium dynamics.

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