MONETARY POLICY RULES AND BUSINESS CYCLE CONDITIONS*

This paper estimates a threshold monetary policy rule model for the USA, UK and Japan to investigate if monetary policy changes depend on business cycle conditions, i.e. recessions and expansions of the economy. Then, the paper evaluates the policy implications of this monetary policy rule. Using a long span of data, the paper provides clear‐cut evidence that, while during expansions the monetary authorities of the above countries follow the Taylor rule, during recessions they tend to abandon this policy rule and follow a passive monetary policy focused on interest rate smoothing over time. As shown in the paper, this passive monetary policy can not dampen the volatility effects of negative demand or supply macroeconomic shocks on the economy.