This paper considers optimal monetary in the context of the central bank adopting a asymmetric objective function. We exploit a procedure, due to Varian and Zellner, to derive policies under commitment and discretion. Our results show that under asymmetric preferences, many of the extant results on the time consistency problem no longer hold. A striking feature of the optimal policy solutions is that a committed policymaker is not unambiguously preferred to his discretionary counterpart. Moreover, the form of the optimal discretionary solution indicates that the usual mechanisms to eliminate the inflation bias are inappropriate.
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number
dp306.
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