Monetary Policy with a Nonlinear Phillips Curve and Asymmetric Loss
AbstractRecent 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.
Volume (Year): 3 (1999)
Issue (Month): 4 (January)
Contact details of provider:
Web page: http://www.degruyter.com
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- 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, vol. 57(2), pages 195-199, 05.
- 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.
- Tambakis, D.N., 2008.
"Optimal Monetary Policy with a Convex Phillips Curve,"
Cambridge Working Papers in Economics
0859, Faculty of Economics, University of Cambridge.
- Tambakis Demosthenes N., 2009. "Optimal Monetary Policy with a Convex Phillips Curve," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-25, June.
- al-Nowaihi, Ali & Stracca, Livio, 2002. "Non-standard central bank loss functions, skewed risks, and certainty equivalence," Working Paper Series 0129, European Central Bank.
- Orlando Gomes, 2010.
"Nonlinear Inflation Expectations and Endogenous Fluctuations,"
Czech Economic Review,
Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 4(3), pages 263-280, November.
- Gomes, Orlando, 2006. "Nonlinear inflation expectations and endogenous fluctuations," MPRA Paper 2842, University Library of Munich, Germany.
- 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
139, Money Macro and Finance Research Group.
- Orlando Gomes & Diana A. Mendes & Vivaldo M. Mendes & José Sousa Ramos, 2006. "Endogenous Cycles in Optimal Monetary Policywith a Nonlinear Phillips Curve," Working Papers Series 1 ercwp1508, ISCTE-IUL, Business Research Unit (BRU-IUL).
- Gomes, Orlando, 2006. "Monetary policy and economic growth: combining short and long run macro analysis," MPRA Paper 2849, University Library of Munich, Germany.
- Pu Chen & Peter Flaschel, 2005. "Keynesian Dynamics and the Wage–Price Spiral: Identifying Downward Rigidities," Computational Economics, Society for Computational Economics, vol. 25(1), pages 115-142, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.