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Time-varying asymmetries in central bank preferences: The case of the ECB

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  • Ikeda, Taro
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    Abstract

    This paper examines the asymmetric preferences of the European central bank (ECB) as identified by (Surico, 2007a) and (Surico, 2008). Under asymmetric preferences, a central banker places different weights on the losses associated with positive and negative deviations of economic variables such as inflation or output from their target values. Although asymmetry is conventionally estimated by the generalized method of moments, we use the bias correction Kalman filter suggested by Kim (2006), introducing the concept of time-varying asymmetry in central bank preferences. Estimates of the interest rate reaction functions suggest asymmetries in preferences for both output gap and interest rate. These asymmetries indicate that the ECB increases its interest rate aggressively when there is a surge in output but does not sustain an interest rate above its reference value.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 32 (2010)
    Issue (Month): 4 (December)
    Pages: 1054-1066

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    Handle: RePEc:eee:jmacro:v:32:y:2010:i:4:p:1054-1066

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

    Related research

    Keywords: Time-varying parameter model Asymmetric objective function Endogenous regressors;

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    Cited by:
    1. Pierdzioch, Christian & Rülke, Jan-Christoph & Stadtmann, Georg, 2012. "On the loss function of the Bank of Canada: A note," Economics Letters, Elsevier, vol. 115(2), pages 155-159.

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