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Asymmetric central bank's preference and inflation rate in Jordan

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  • Osama D. Sweidan
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    Abstract

    Purpose – The purpose of this paper is to examine the hypothesis that a central bank's asymmetric preferences are able to explain inflation rate in a developing country. In addition, it seeks to help comprehend movements of inflation rate in Jordan and to understand Central Bank of Jordan preferences regarding inflation rate and output. Design/methodology/approach – A standard monetary model consists of a central bank's loss function and an economy structure is constructed, which acts as a constraint on the central bank's behavior. Then, a distribute-lag version of the derived model is estimated using ordinary least squares method. Findings – The empirical evidence from the Jordanian economy shows that inflation rate relies on the variances of inflation rate and the variances of output. This finding supports the hypothesis that a central bank's asymmetric loss function is able to justify inflation rate movements. Moreover, the Jordanian central banker prefers higher inflation rate and higher level of output. Originality/value – The paper provides evidence from a developing country regarding the ability of the asymmetric central bank preferences to justify inflation rate movement. In addition, the paper links central banks' losses with the uncertainty level and inflation rate in the economy.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Studies in Economics and Finance.

    Volume (Year): 26 (2009)
    Issue (Month): 4 (October)
    Pages: 232-245

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    Handle: RePEc:eme:sefpps:v:26:y:2009:i:4:p:232-245

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    Related research

    Keywords: Central banks; Developing countries; Inflation; Jordan; Monetary policy;

    References

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    1. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    2. repec:ant:wpaper:1999002 is not listed on IDEAS
    3. Jagjit Chadha & Philip Schellekens, 1999. "Monetary policy loss functions: two cheers for the quadratic," Bank of England working papers 101, Bank of England.
    4. Taylor, John B., 1980. "Output and price stability: An international comparison," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 109-132, May.
    5. Doyle, Matthew & Falk, Barry, 2010. "Do asymmetric central bank preferences help explain observed inflation outcomes?," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 527-540, June.
    6. Francisco J. Ruge-Murcia, 2001. "Inflation Targeting Under Asymmetric Preferences," Banco de Espa�a Working Papers 0106, Banco de Espa�a.
    7. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    8. A. Robert Nobay & David A. Peel, 2003. "Optimal Discretionary Monetary Policy in a Model of Asymmetric Central Bank Preferences," Economic Journal, Royal Economic Society, vol. 113(489), pages 657-665, 07.
    9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    10. Glenn D. Rudebusch, 2006. "Monetary Policy Inertia: Fact or Fiction?," International Journal of Central Banking, International Journal of Central Banking, vol. 2(4), December.
    11. Ruge-Murcia, Francisco J., 2004. "The inflation bias when the central bank targets the natural rate of unemployment," European Economic Review, Elsevier, vol. 48(1), pages 91-107, February.
    12. Tushar Poddar & Hasmik Khachatryan & Randa Sab, 2006. "The Monetary Transmission Mechanism in Jordan," IMF Working Papers 06/48, International Monetary Fund.
    13. Alex Cukierman & Anton Muscatelli, 2001. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability?," Working Papers 2002_4, Business School - Economics, University of Glasgow, revised Mar 2002.
    14. Alex Cukierman & V. Anton Muscatelli, 2002. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability? - Theory and Evidence," CESifo Working Paper Series 764, CESifo Group Munich.
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