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US Monetary Policy Rules: the Case for Asymmetric Preferences

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  • Surico, Paolo

    (Universita Bocconi)

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.

Suggested Citation

  • Surico, Paolo, 2003. "US Monetary Policy Rules: the Case for Asymmetric Preferences," Royal Economic Society Annual Conference 2003 199, Royal Economic Society.
    • Handle: RePEc:ecj:ac2003:199
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    Cited by:

    1. Florio, Anna, 2006. "Asymmetric interest rate smoothing: The Fed approach," Economics Letters, Elsevier, vol. 93(2), pages 190-195, November.
    2. David G. Mayes & Matti Virén, 2004. "Asymmetries in the Euro area economy," Macroeconomics 0404024, University Library of Munich, Germany.
    3. M. S. Mohanty & Marc Klau, 2005. "Monetary Policy Rules in Emerging Market Economies: Issues and Evidence," Springer Books, in: Rolf J. Langhammer & Lúcio Vinhas Souza (ed.), Monetary Policy and Macroeconomic Stabilization in Latin America, pages 205-245, Springer.
    4. Paolo Zagaglia, 2006. "How reliable are Taylor rules? A view from asymmetry in the U.S. Fed funds rate," Economics Bulletin, AccessEcon, vol. 5(14), pages 1-11.
    5. Castelnuovo, Efrem, 2003. "Taylor rules, omitted variables, and interest rate smoothing in the US," Economics Letters, Elsevier, vol. 81(1), pages 55-59, October.
    6. Paolo Surico, 2003. "How does the ECB target inflation?," Macroeconomics 0305005, University Library of Munich, Germany.
    7. Efrem Castelnuovo, 2003. "Taylor Rules and Interest Rate Smoothing in the US and EMU," Macroeconomics 0303002, University Library of Munich, Germany.
    8. Firrell, Alastair & Reinold, Kate, 2020. "Uncertainty and voting on the Bank of England’s Monetary Policy Committee," Bank of England working papers 898, Bank of England.
    9. Abdul RASHID & Farah WAHEED, 2021. "Forward-Backward-Looking Monetary Policy Rules: Derivation and Empirics," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 71-92, December.

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    More about this item

    Keywords

    nonlinear optimal monetary policy rules; asymmetric loss function; linearized central bank Euler equation;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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