The Nonlinear Phillips Curve and Inflation Forecast Targeting: Symmetric versus Asymmetric Monetary Policy Rules

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The Nonlinear Phillips Curve and Inflation Forecast Targeting: Symmetric versus Asymmetric Monetary Policy Rules

Author Info

Schaling, Eric

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Eric Schaling

Abstract

We 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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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 36 (2004)
Issue (Month): 3 (June)
Pages: 361-86
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Handle: RePEc:mcb:jmoncb:v:36:y:2004:i:3:p:361-86

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Paper
- Schaling, E., 1998. "The nonlinear Phillips curve and inflation forecast targetting : symmetric versus asymmetric monetary policy rules," Discussion Paper 136, Tilburg University, Center for Economic Research. [Downloadable!]

References listed on IDEAS
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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 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.
Eijffinger, S.C.W. & Hoeberichts, M. & Schaling, E., 1997. "Why money talks and wealth whispers : monetary uncertainty and mystique," Discussion Paper 47, Tilburg University, Center for Economic Research. [Downloadable!]
Other versions:
- 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.

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Cited by:
(explanations, 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.)

Ruthira Naraidoo & Rangan Gupta, 2009. "Modelling monetary policy in South Africa: Focus on inflation targeting era using a simple learning rule," Working Papers 200904, University of Pretoria, Department of Economics. [Downloadable!]
Lein, Sarah M. & Köberl, Eva, 2009. "Capacity Utilisation, Constraintes and Price Adjustments under the Microscope," Working Papers 2009-6, Swiss National Bank. [Downloadable!]
Other versions:
- Sarah M. Lein & Eva Köberl, 2009. "Capacity Utilisation, Constraints and Price Adjustments under the Microscope," KOF Working papers 09-239, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
Emmanuel De Veirman, 2007. "Which nonlinearity in the Phillips curve? The absence of accelerating deflation in Japan," Reserve Bank of New Zealand Discussion Paper Series DP2007/14, Reserve Bank of New Zealand. [Downloadable!]
Other versions:
- Emmanuel De Veirman, 2007. "Which Nonlinearity in the Phillips Curve? The Absence of Accelerating Deflation in Japan," Economics Working Paper Archive 536, The Johns Hopkins University,Department of Economics. [Downloadable!]
Mayes , David G. & Virén , Matti, 2004. "Asymmetries in the Euro area economy," Research Discussion Papers 9/2004, Bank of Finland. [Downloadable!]
Other versions:
- David G. Mayes & Matti Virén, 2004. "Asymmetries in the Euro area economy," Macroeconomics 0404024, EconWPA. [Downloadable!]
L.J. Christiano & C.J. Gust, 1999. "Taylor Rules in a Limited Participation Model," DNB Staff Reports (discontinued) 33, Netherlands Central Bank. [Downloadable!]
Eijffinger, Sylvester C W & Schaling, Eric & Tesfaselassie, Mewael F., 2006. "Learning About the Term Structure and Optimal Rules for Inflation Targeting," CEPR Discussion Papers 5896, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Other versions:
- Tesfaselassie, Mewael F. & Schaling, Eric & Eijffinger, Sylvester, 2006. "Learning about the term structure and optimal rules for inflation targeting," Discussion Paper 88, Tilburg University, Center for Economic Research. [Downloadable!]
- Tesfaselassie, M.F. & Schaling, E. & Eijffinger, S.C.W., 2006. "Learning About the Term Structure and Optimal Rules for Inflation Targeting," Research Paper ERS-2006-058-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
Costas Milas & Ruthira Naraidoo, 2009. "Financial Market Conditions, Real Time, Nonlinearity and European Central Bank Monetary Policy: In-Sample and Out-of-Sample Assessment," Working Papers 200923, University of Pretoria, Department of Economics. [Downloadable!]

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