What do economist mean when they say that monetary policy can exhibit cyclical asymmetry?

Answer 1

Monetary policy may be highly effective in slowing expansions and controlling inflation but much less reliable in pushing the economy from a recession-particularly if it is severe. In short, monetary policy may suffer from cyclical asymmetry.

If pursued vigorously, a tight money policy could deplete commercial banking reserves to the point where banks were forced to reduce the volume of loans. That would mean a contraction of the money

supply, higher interest rates, and reduced aggregate

demand. The Fed can turn down the monetary spigot and eventually achieve its goal.

But it cannot be certain of achieving its goal when it turns up the monetary spigot. An easy money policy suffers from a "You can lead a horse to water, but you cannot make it drink" problem. The Fed

can create excess reserves, but it cannot guarantee that the banks will actually make the loans and thus increase the supply of money. If commercial banks, seeking liquidity, are unwilling to lend, the efforts of

the Fed will be of little avail. Similarly, businesses can frustrate the intentions of the Fed by deciding not to borrow excess reserves. And the public may use money pumped into the economy via openmarket

operations to pay off existing bank loans.

Furthermore, a severe recession may so undermine business confidence that the investment demand curve shifts to the left and frustrates an easy money policy.