Do Central Banks have Precautionary Demands for Expansions and for Price Stability?
Abstract
This paper analyses the impact of asymmetric preferences with respect to inflation and output by policymakers on interest-rate reaction functions. A theoretical framework which makes it possible to identify the dominant type of asymmetry is developed and related to the precautionary demand of pol- icymakers for expansions and for low inßation. Using data for some G7 economies, the paper shows that, except for Germany, nonlinear and asym- metric behaviour is present. A main Þnding is that where credibility-building and disinflation has already been achieved, the monetary authorities develop a greater precautionary demand for output expansions than for low inflation. This may generate a new type of inflation bias. Conversely, where credibility- building is still a concern for the authorities, managing the business cycle is dominated by concerns of the monetary authorities to keep inflation expec- tations low.Download Info
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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2002_4.Length:
Date of creation: Jul 2001
Date of revision: Mar 2002
Handle: RePEc:gla:glaewp:2002_4
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Keywords: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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-10-08 (All new papers)
- NEP-CBA-2002-10-08 (Central Banking)
- NEP-MON-2002-10-08 (Monetary Economics)
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