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Monetary Policy with a Nonlinear Phillips Curve and Asymmetric Loss

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  • Tambakis Demosthenes N.

    (City University Business School)

Abstract

Recent theoretical and empirical work has cast doubt on the hypotheses of a linear Phillips curve and a symmetric quadratic loss function underlying traditional thinking on monetary policy. This paper studies the one-period optimal monetary policy problem under an asymmetric loss function corresponding to the "opportunistic approach" to disinflation and a convex Phillips curve. The policy-inaction range and its properties are derived analytically. Numerical simulations are then used to assess the implications of asymmetric loss for the distributional properties of the equilibrium levels of inflation and unemployment. For parameter values relevant to the U.S., it is found that the asymmetric loss function yields an average inflation rate in excess of the target, and that bias is larger than the standard symmetric loss function. For moderate policy-maker preferences, the asymmetric loss function also yields a smaller gap between average unemployment and the natural rate, and higher (lower) variance of inflation (unemployment) compared to the symmetric benchmark. Calibrating the model to match the observed average unemployment rate requires a high degree of inflation aversion and small asymmetry.

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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 3 (1999)
Issue (Month): 4 (January)
Pages: 1-17

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Handle: RePEc:bpj:sndecm:v:3:y:1999:i:4:n:4

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Cited by:
  1. O. Gomes & V. M. Mendes & D. A. Mendes & J. Sousa Ramos, 2007. "Chaotic dynamics in optimal monetary policy," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, Springer, vol. 57(2), pages 195-199, 05.
  2. Gomes, Orlando, 2006. "Nonlinear inflation expectations and endogenous fluctuations," MPRA Paper 2842, University Library of Munich, Germany.
  3. George Christodoulakis & David Peel, 2009. "The Central Bank Inflation Bias in the Presence of Asymmetric Preferences and Non-Normal Shocks," Economics Bulletin, AccessEcon, vol. 29(3), pages 1608-1620.
  4. Pu Chen & Peter Flaschel, 2005. "Keynesian Dynamics and the Wage–Price Spiral: Identifying Downward Rigidities," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 25(1), pages 115-142, February.
  5. Gomes, O. & Mendes, D. A. & Mendes, V. P. & Sousa Ramos, J., 2007. "Endogenous Cycles in Optimal Monetary Policy with a Nonlinear Phillips Curve," Money Macro and Finance (MMF) Research Group Conference 2006, Money Macro and Finance Research Group 139, Money Macro and Finance Research Group.
  6. Gomes, Orlando, 2006. "Monetary policy and economic growth: combining short and long run macro analysis," MPRA Paper 2849, University Library of Munich, Germany.
  7. Tambakis, D.N., 2008. "Optimal Monetary Policy with a Convex Phillips Curve," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0859, Faculty of Economics, University of Cambridge.
  8. al-Nowaihi, Ali & Stracca, Livio, 2002. "Non-standard central bank loss functions, skewed risks, and certainty equivalence," Working Paper Series, European Central Bank 0129, European Central Bank.

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