Asymmetric central bank preferences and inflation rate in Tunisia

This article fits into the new strand of literature related to the asymmetric central bank preferences and its effect on the inflation dynamic. In reality, the central banker preferences are more likely to be asymmetric. Central banker can be, for various reasons, more averse toward deviations from target with one sign more than deviations from target with the other sign. The interaction of asymmetric central bank preferences with uncertainty arising from the volatility of inflation and output may affect the inflation movements. This paper aims to check the hypothesis that asymmetric central bank preferences are able to explain inflation rate for the case of Tunisia and to understand Central Bank of Tunisia preferences toward inflation rate and output during the period ranging from 1993 to 2010. We refer to a standard monetary model that includes asymmetric loss function and a linear supply curve which acts as a constraint on the central bank behavior. The results show that the inflation rate depends on the output gap and on the conditional variance of inflation and provide evidence for asymmetric central bank preferences. The Central Bank of Tunisia seems to be more averse to high inflation which is consistent with its ultimate goal explicitly announced to preserve price stability.