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Do asymmetric central bank preferences help explain observed inflation outcomes?

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  • Doyle, Matthew
  • Falk, Barry

Abstract

When the central banker's loss function is asymmetric, changes in the volatility of inflation and/or unemployment affect equilibrium inflation. This suggests that changing macroeconomic volatilities may be an important driving force behind trends in observed inflation. Previous evidence, which has offered support for this idea, suffers from a spurious regression problem. Once this problem is controlled for, the evidence suggests that the volatility of unemployment does not help explain inflation outcomes. There is some evidence of a relationship between inflation and its volatility, but overall the data does not support the view that changing economic volatility, as filtered through asymmetric central bank preferences, is an important driver of inflation trends.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 32 (2010)
Issue (Month): 2 (June)
Pages: 527-540

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Handle: RePEc:eee:jmacro:v:32:y:2010:i:2:p:527-540

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Web page: http://www.elsevier.com/locate/inca/622617

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Keywords: Monetary policy Time inconsistency Inflation Asymmetric loss function;

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Cited by:
  1. Laban K. Chesang & Ruthira Naraidoo, 2014. "Parameter Uncertainty and Inflation Dynamics in a Model with Asymmetric Central Bank Preferences," Working Papers 201437, University of Pretoria, Department of Economics.
  2. Fabián Gredig, 2007. "Asymmetric Monetary Policy Rules and the Achievement of the Inflation Target: The Case of Chile," Working Papers Central Bank of Chile, Central Bank of Chile 451, Central Bank of Chile.
  3. Ikeda, Taro, 2010. "Time-varying asymmetries in central bank preferences: The case of the ECB," Journal of Macroeconomics, Elsevier, Elsevier, vol. 32(4), pages 1054-1066, December.
  4. Osama D. Sweidan, 2009. "Asymmetric central bank's preference and inflation rate in Jordan," Studies in Economics and Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 26(4), pages 232-245, October.
  5. López-Villavicencio, Antonia, 2013. "Interest rates, government purchases and the Taylor rule in recessions and expansions," Journal of Macroeconomics, Elsevier, Elsevier, vol. 38(PB), pages 382-392.

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