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Are Central Bank Preferences Asymmetric? A Comment

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  • Minford, Patrick

    ()
    (Cardiff Business School)

  • Srinivasan, Naveen

Abstract

A recent paper by Ruge-Murcia [European Economic Review 48 (2004), 91-107] on asymmetric central bank objectives provides a new perspective on the policy roots of inflation in developed economies. More precisely, the paper demonstrates that if the distribution of the supply shocks is normal, then the reduced form solution for inflation implies a positive (or negative) relation between average inflation and the variance of shocks. We argue that the evidence offered in support of this hypothesis suffers from lack of identification because Phillips curve nonlinearity combined with quadratic central bank preferences yield the same reduced form solution for inflation. If so, estimating reduced form for inflation will not be able to discriminate between these models. Yet they have quite different implications for policy. Other, structural, evidence is needed.

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Bibliographic Info

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2008/5.

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Length: 13 pages
Date of creation: Feb 2008
Date of revision:
Publication status: Published in Economic Notes , Banca Monte dei Paschi di Siena SpA, vol. 37(1) (2008), 119-126
Handle: RePEc:cdf:wpaper:2008/5

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Keywords: Preference asymmetry; Phillips curve nonlinearity; Identification;

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  1. Orphanides, Athanasios & Wieland, Volker, 2000. "Inflation zone targeting," European Economic Review, Elsevier, Elsevier, vol. 44(7), pages 1351-1387, June.
  2. Alex Cukierman & Stefan Gerlach, 2003. "The inflation bias revisited: theory and some international evidence," Manchester School, University of Manchester, University of Manchester, vol. 71(5), pages 541-565, 09.
  3. RUGE-MURCIA, Francisco J., 2001. "The Inflation Bias When the Central Bank Targets, the Natural Rate of Unemployment," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2001-22, Universite de Montreal, Departement de sciences economiques.
  4. A. Robert Nobay & David A. Peel, 2003. "Optimal Discretionary Monetary Policy in a Model of Asymmetric Central Bank Preferences," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(489), pages 657-665, 07.
  5. Minford, Patrick & Srinivasan, Naveen, 2006. "Opportunistic monetary policy: An alternative rationalization," Journal of Economics and Business, Elsevier, Elsevier, vol. 58(5-6), pages 366-372.
  6. Alan S. Blinder, 1997. "Distinguished Lecture on Economics in Government: What Central Bankers Could Learn from Academics--And Vice Versa," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(2), pages 3-19, Spring.
  7. Naveen Srinivasan & Vidya Mahambare & M. Ramachandran, 2006. "UK monetary policy under inflation forecast targeting: is behaviour consistent with symmetric preferences?," Oxford Economic Papers, Oxford University Press, vol. 58(4), pages 706-721, October.
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Cited by:
  1. Doyle, Matthew & Falk, Barry, 2010. "Do asymmetric central bank preferences help explain observed inflation outcomes?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 32(2), pages 527-540, June.
  2. Pierdzioch, Christian & R├╝lke, Jan-Christoph & Stadtmann, Georg, 2012. "On the loss function of the Bank of Canada: A note," Economics Letters, Elsevier, Elsevier, vol. 115(2), pages 155-159.
  3. Srinivasan, Naveen & Jain, Sumit & Ramachandran, M., 2009. "Monetary policy and the behaviour of inflation in India: Is there a need for institutional reform?," Journal of Asian Economics, Elsevier, Elsevier, vol. 20(1), pages 13-24, January.

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