Optimal Monetary Policy Rules under Inflation Range Targeting
In: Monetary Policy: Rules and Transmission Mechanisms
AbstractWe calculate and compare optimal monetary policy (MP) rules for a simple economy under alternative central bank objective (loss) functions. We compare both soft- and hard-edges range (zone) targeting as well as asymmetric loss-functions to a quadratic loss case. The latter represents the standard loss-function for point inflation targeting. The results show that MP aggressiveness under range targeting critically depends on how hard are the edges of this range. If a range is thought of as a thick point objective, MP is always active (there are no inaction zones), although it is less aggressive against inflation and output shocks if range edges are sufficiently soft (vis-Ã -vis a point target). Harder edges makes MP more aggressive even when the economy is close to the central part of the range. Finally, an asymmetric loss-function for inflation that penalizes positive deviations relatively more generates a bias against output.
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This chapter was published in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Monetary Policy: Rules and Transmission Mechanisms, , chapter 5, pages 095-116, 2002.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v04c05pp095-116.
Other versions of this item:
- Medina, J.P. & Valdes, R., 2000. "Optimal Monetary Policy Rules Under Inflation Range Targeting," Papers 61, Cambridge - Risk, Information & Quantity Signals.
- Juan Pablo Medina & Rodrigo Valdés, 2000. "Optimal Monetary Policy Rules Under Inflation Range Targeting," Working Papers Central Bank of Chile 61, Central Bank of Chile.
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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- Sebastian Edwards, 2006.
"The Relationship Between Exchange Rates and Inflation Targeting Revisited,"
Working Papers Central Bank of Chile
409, Central Bank of Chile.
- Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," NBER Working Papers 12163, National Bureau of Economic Research, Inc.
- Pablo Gonzalez & Mauricio Tejada, 2006.
"No Linealidades en la Regla de Política Monetaria del Banco Central de Chile: Una Evidencia Empírica,"
ILADES-Georgetown University Working Papers
inv173, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
- Pablo Gonzalez & Mauricio Tejada, 2006. "No linealidades en la regla de política monetaria del Banco Central de Chile: una evidencia empírica," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Economics Department, vol. 21(1), pages 81-115, July.
- Morón, Eduardo & Winkelried, Diego, 2002. "Reglas de política monetaria para economías financieramente vulnerables," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 8, pages 49-76.
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