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Inflation Targeting and Nonlinear Policy Rules: The Case of Asymmetric Preferences (new title: The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences)

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  • Paolo Surico

Abstract

This paper investigates the empirical relevance of a new framework for monetary policy analysis in which the decision-makers are allowed to weight differently positive and negative deviations of inflation and output from the target values. Reduced-form and structural estimates of the central bank first order condition indicate that the preferences of the Fed have been highly asymmetric only before 1979, with the response to output contractions being larger than the response to output expansions of the same magnitude. This asymmetry is shown to induce an average inflation bias of 1.11% that appears to have substantially contributed to the great inflation of the 1960s and 1970s.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2004/wp-cesifo-2004-09/cesifo1_wp1280.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1280.

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Date of creation: 2004
Date of revision:
Handle: RePEc:ces:ceswps:_1280

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Keywords: asymmetric objective; nonlinear monetary policy rules; average inflation bias;

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Cited by:
  1. 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, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 21(1), pages 81-115, July.
  2. Alvaro Aguiar & Manuel Martins, 2008. "Testing for asymmetries in the preferences of the euro-area monetary policymaker," Applied Economics, Taylor & Francis Journals, vol. 40(13), pages 1651-1667.
  3. Gomes, O. & Mendes, D. A. & Mendes, V. P. & Sousa Ramos, J., 2007. "Endogenous Cycles in Optimal Monetary Policy with a Nonlinear Phillips Curve," Money Macro and Finance (MMF) Research Group Conference 2006 139, Money Macro and Finance Research Group.
  4. Gomes, Orlando, 2006. "Monetary policy and economic growth: combining short and long run macro analysis," MPRA Paper 2849, University Library of Munich, Germany.
  5. L'OEILLET, Guillaume & LICHERON, Julien, 2010. "The asymmetric relationship between oil prices and activity in the EMU: Does the ECB monetary policy play a role?," MPRA Paper 26203, University Library of Munich, Germany.
  6. Simone Casellina & Mariacristina Uberti, 2008. "Optimal Monetary Policy and Long-term Interest Rate Dynamics: Taylor Rule Extensions," Computational Economics, Society for Computational Economics, vol. 32(1), pages 183-198, September.
  7. Doyle, Matthew & Falk, Barry, 2010. "Do asymmetric central bank preferences help explain observed inflation outcomes?," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 527-540, June.

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