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A Prudent Central Banker

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  • Francisco J. Ruge-Murciá

    (International Monetary Fund)

Abstract

This paper studies the role of prudence in modern central banking. To that end, it relaxes the usual assumption of quadratic preferences and adopts instead an asymmetric preference specification whereby positive deviations from a target can be weighted more, or less, severely than negative deviations. It is shown that prudence with respect to inflation (unemployment) reduces (increases) equilibrium inflation. The overall effect depends on the relative magnitude of the preference parameters and the conditional variances of inflation and unemployment. The implications of the model are examined using cross-section data from OECD countries. . Copyright 2002, International Monetary Fund

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Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 49 (2002)
Issue (Month): 3 ()
Pages: 7

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Handle: RePEc:pal:imfstp:v:49:y:2002:i:3:p:7

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  1. Svensson, Lars E. O., 1998. "Inflation targeting as a monetary policy rule," CFS Working Paper Series, Center for Financial Studies (CFS) 1998/16, Center for Financial Studies (CFS).
  2. Muscatelli, V Anton, 1999. "Inflation Contracts and Inflation Targets under Uncertainty: Why We Might Need Conservative Central Bankers," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 66(262), pages 241-54, May.
  3. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers, C.V. Starr Center for Applied Economics, New York University 99-13, C.V. Starr Center for Applied Economics, New York University.
  4. Christoffersen & Diebold, . "Optimal Prediction Under Asymmetric Loss," Home Pages, University of Pennsylvania 167, 1996., University of Pennsylvania.
  5. Beetsma, R.M.W.J. & Jensen, H., 1996. "Inflation targets and contracts with uncertain central banker preferences," Discussion Paper, Tilburg University, Center for Economic Research 1996-93, Tilburg University, Center for Economic Research.
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  7. Lars E.O. Svensson, 1995. "Optimal Inflation Targets, `Conservative' Central Banks, and Linear Inflation Contracts," NBER Working Papers 5251, National Bureau of Economic Research, Inc.
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  9. Ruge-Murcia, F.J., 1998. "Uncovering Financial Markets Beliefs About Inflation Targets," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9803, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  11. RUGE-MURCIA, Francisco .J., 2001. "Inflation Targeting Under Asymmetric Preferences," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2001-04, Universite de Montreal, Departement de sciences economiques.
  12. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, Econometric Society, vol. 57(4), pages 937-69, July.
  13. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 53-84, December.
  14. McCallum, Bennett T, 1995. "Two Fallacies Concerning Central-Bank Independence," American Economic Review, American Economic Association, American Economic Association, vol. 85(2), pages 207-11, May.
  15. Jensen, Henrik, 1997. "Credibility of Optimal Monetary Delegation," American Economic Review, American Economic Association, American Economic Association, vol. 87(5), pages 911-20, December.
  16. Peter N. Ireland, 1998. "Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?," Boston College Working Papers in Economics, Boston College Department of Economics 415, Boston College Department of Economics.
  17. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, Econometric Society, vol. 59(3), pages 667-86, May.
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