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Do Central Banks have Precautionary Demands for Expansions and for Price Stability? -- Theory and Evidence

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Author Info
Cukierman, Alex
Muscatelli, V. Anton

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Abstract

This paper analyses the impact of asymmetric preferences with respect to inflation and output by policymakers on interest-rate reaction functions and test for their existence. A modified New Keynesian framework which makes it possible to identify the dominant type of asymmetry is developed and related to the precautionary demand of policymakers for expansions and for low inflation. Using data for four G7 economies, the paper shows that, except for Germany, nonlinear and asymmetric behaviour is present. A main finding, for the US, is that after credibility-building and disinflation have been established, the monetary authority develops a greater precautionary demand for output expansions than for low inflation. This may generate a new type of inflation bias. Conversely, where, as is the case in the UK, credibility-building is still a concern for the authorities, managing the business cycle is dominated by concerns of the monetary authorities to keep inflation expectations low.

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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 764.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_764

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Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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  1. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February. [Downloadable!] (restricted)
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  2. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  3. A. Robert Nobay & David A. Peel, 1998. "Optimal Monetary Policy in a Model of Asymmetric Central Bank Preferences," FMG Discussion Papers dp306, Financial Markets Group. [Downloadable!] (restricted)
  4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
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  6. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August. [Downloadable!] (restricted)
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  7. Willem H. Buiter, 1999. "Alice in Euroland," Journal of Common Market Studies, Blackwell Publishing, vol. 37(2), pages 181-209, 06. [Downloadable!] (restricted)
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  8. Dolado, Juan J. & María-Dolores, Ramón & Naveira Barrero, Manuel, 2000. "Asymmetries In Monetary Policy Rules: Evidence For Four Central Banks," CEPR Discussion Papers 2441, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  12. Alex Cukierman, 2002. "Are contemporary central banks transparent about economic models and objectives and what difference does it make?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 15-36. [Downloadable!]
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  13. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January. [Downloadable!] (restricted)
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  14. Petra Geraats, 2006. "Inflation and Its Variation: An Alternative Explanation," Center for International and Development Economics Research, Working Paper Series 1017, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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  15. Anton Muscatelli & Patrzio Tirelli & Carmine Trecroci, 1998. "Does Institutional Change Really Matter? Inflation Targets, Central Bank Reform And Interest Rate Policy In The Oecd Countries," Working Papers 1999_20, Department of Economics, University of Glasgow, revised Jul 1999. [Downloadable!]
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  16. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June. [Downloadable!] (restricted)
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  17. RUGE-MURCIA, Francisco J., 2001. "The Inflation Bias When the Central Bank Targets, the Natural Rate of Unemployment," Cahiers de recherche 2001-22, Universite de Montreal, Departement de sciences economiques. [Downloadable!]
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  18. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
  19. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [Downloadable!] (restricted)
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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.)

  1. Efrem Castelnuovo, 2003. "Taylor Rules and Interest Rate Smoothing in the US and EMU," Macroeconomics 0303002, EconWPA. [Downloadable!]
  2. V. Anton Muscatelli & Tiziano Ropele & Patrizio Tirelli, 2004. "Fiscal and Monetary Policy Interactions in a New Keynesian Model with Liquidity Constraints," Working Papers 83, University of Milano-Bicocca, Department of Economics, revised Nov 2004. [Downloadable!]
    Other versions:
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