The Nonlinear Phillips Curve and Inflation Forecast Targeting: Symmetric versus Asymmetric Monetary Policy Rules
AbstractWe study a simple, small dynamic economy that a policymaker is attempting to control via use of a monetary policy rule. The model features a convex Phillips curve, in that positive deviations of aggregate demand from potential are more inflationary than negative deviations are disinflationary. Using dynamic optimization techniques, we find that the form of the optimal monetary policy reaction function is asymmetric. We show that in the optimal rule the interest rate is a nonlinear function of the deviation of inflation from its target and of output from potential. With asymmetry, optimal monetary policy becomes more active as uncertainty about the impact of policy increases. We thus provide an important and novel theoretical reason why increased uncertainty can lead to more aggressive rather than toward more cautious optimal policies.
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Bibliographic InfoArticle provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.
Volume (Year): 36 (2004)
Issue (Month): 3 (June)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879
Other versions of this item:
- Schaling, E., 1998. "The Nonlinear Phillips Curve and Inflation Forecast Targeting - Symmetric Versus Asymmetric Monetary Policy Rules," Discussion Paper 1998-136, Tilburg University, Center for Economic Research.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Eijffinger, Sylvester C W & Hoeberichts, Marco & Schaling, Eric, 2000.
"Why Money Talks and Wealth Whispers: Monetary Uncertainty and Mystique,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 32(2), pages 218-35, May.
- Eijffinger, S.C.W. & Hoeberichts, M.M. & Schaling, E., 1997. "Why Money Talks and Wealth Whispers: Monetary Uncertainty and Mystique," Discussion Paper 1997-47, Tilburg University, Center for Economic Research.
- Douglas Laxton & Guy Meredith & David Rose, 1994.
"Asymmetric Effects of Economic Activity on Inflation - Evidence and Policy Implications,"
IMF Working Papers
94/139, International Monetary Fund.
- Douglas Laxton & Guy Meredith & David Rose, 1995. "Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 344-374, June.
- Douglas Laxton & Guy Debelle, 1996.
"Is the Phillips Curve Really a Curve? Some Evidence for Canada, the United Kingdom, and the United States,"
IMF Working Papers
96/111, International Monetary Fund.
- Guy Debelle & Douglas Laxton, 1997. "Is the Phillips Curve Really a Curve? Some Evidence for Canada, the United Kingdom, and the United States," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 249-282, June.
- Peter Clark & Douglas Laxton & David Rose, 1996. "Asymmetry in the U.S. Output-Inflation Nexus," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 216-251, March.
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