Neutrality of Money and Asymmetry in Monetary Shocks in the Iranian Economy, Considering the Size and Direction of Shocks

The goal of this study is analyzing the effects of the positive and negative monetary shocks on production. Therefore, by using the seasonal data during 1990-2017, and the bounds tests, Markov’s switching model, and autoregressive models with distributive lags to test the new Keynesian theory about the asymmetric effect of shocks on production. Thus, by extending a Markov equation for growth of liquidity, positive, negative, big and small shocks were extracted. Then, using an ARDL model, the effects of small and big shocks on economic growth were analyzed. The results have shown that in the long run, both Small and Large monetary shocks (whether Positive or negative) are incapable of affecting production. This means that money is neutral in the long run. But in the short run, monetary shocks affect the production, where, the impact of negative shocks is far greater than the effect of positive shocks. With considering the size of shocks, the effect of small negative shocks and large negative shocks is more than the effect of small positive shocks and large positive shocks. On the other hand, there is an asymmetry between small and big money shocks, because small positive and negative shocks have greater effects than big positive and negative shocks on production, respectively.