Abstract: This paper uses the multiple threshold effect test on the monetary policy rules of the Chinese and American monetary authorities during the “Great Moderation”, “Soft Landing” and “Modern Recession” periods to discover a clear asymmetric preference in the adjustment of nominal interest rates. In times of economic expansion, the nominal interest rate adjustments by the two monetary authorities show a preference for avoiding inflation; however, in times of economic contraction, monetary policy is slanted in favor of closing the output gap. Next, this paper uses an LT-TVP-VAR model under the New Keynesian framework to estimate the time-varying parameters for monetary policy rules to discern the effectiveness of the nominal interest rate adjustments by the Federal Reserve during the “Modern Recession” in curbing business cycle fluctuations. Results show that during the “Modern Recession”, monetary policy is unable to affect a counter-cyclical economic expansion solely through nominal interest rate adjustments. Reversing a continued economic slide requires unconventional monetary policy such as Forward Guidance, Operation Twist, and Quantitative Easing, in order to improve economic vitality and stimulate economic growth.

Keywords: Business Cycle, Monetary Policy Rule, Multiple Threshold Model, LT-TVP-VAR Model.