Inflation Targeting and Nonlinear Policy Rules: the Case of Asymmetric Preferences

No 108, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: This paper investigates the empirical relevance of a new framework for monetary policy analysis in which the decision makers are allowed to weight differently positive and negative deviations of inflation and output from the target values. Reduced-form and structural estimates of the central bank first order condition indicate that the preferences of the Fed have been highly asymmetric only before 1979, with the response to output contractions being larger than the response to output expansions of the same magnitude. This asymmetry is shown to induce an average inflation bias of 1.11% that appears to have substantially contributed to the great inflation of the 1960s and 1970s

Keywords: asymmetric objective; nonlinear monetary policy rules; average inflation bias (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Related works:
Working Paper: Inflation Targeting and Nonlinear Policy Rules: the Case of Asymmetric Preferences (2004)
Working Paper: Inflation Targeting and Nonlinear Policy Rules: the Case of Asymmetric Preferences (2004)
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