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US Monetary Policy Rules: the Case for Asymmetric Preferences

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Author Info
Surico, Paolo (Universita Bocconi)

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Abstract

This paper investigates the empirical relevance of a new framework for monetary policy analysis in which decision makers are allowed to weight differently positive and negative deviations of inflation and output from the target values. The specification of the central bank objective is general enough to nest the symmetric quadratic form as a special case, thereby making the derived policy rule potentially nonlinear. This forms the basis of our identification strategy which is used to evelop a formal hypothesis testing for the presence of asymmetric preferences. Reduced-form estimates of postwar US policy rules indicate that the preferences of the Fed have been highly asymmetric with respect to both inflation and output gaps, with the latter being the dominant source of nonlinearity after 1983.

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Publisher Info
Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 199.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:199

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Web page: http://www.res.org.uk/society/annualconf.asp
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Related research
Keywords: nonlinear optimal monetary policy rules; asymmetric loss function; linearized central bank Euler equation;

Find related papers by JEL classification:
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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  1. Ruthira Naraidoo & Rangan Gupta, 2009. "Modelling monetary policy in South Africa: Focus on inflation targeting era using a simple learning rule," Working Papers 200904, University of Pretoria, Department of Economics. [Downloadable!]
  2. Paolo Surico, 2003. "How does the ECB target inflation?," Working Paper Series 229, European Central Bank. [Downloadable!]
    Other versions:
  3. Efrem Castelnuovo, 2004. "Taylor rules, omitted variables, and interest rate smoothing in the US," Macroeconomics 0403009, EconWPA. [Downloadable!]
    Other versions:
  4. Efrem Castelnuovo, 2003. "Taylor Rules and Interest Rate Smoothing in the US and EMU," Macroeconomics 0303002, EconWPA. [Downloadable!]
  5. Francesco Menoncin & Marco Tronzano, . "Optimal real exchange rate targeting: a stochastic analysis," Working Papers ubs0401, University of Brescia, Department of Economics. [Downloadable!]
  6. Mayes , David G. & Virén , Matti, 2004. "Asymmetries in the Euro area economy," Research Discussion Papers 9/2004, Bank of Finland. [Downloadable!]
    Other versions:
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