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Monetary Policy with a Convex Phillips Curve and Asymmetric Loss

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  • Demosthenes N. Tambakis

Abstract

Recent theoretical and empirical work has cast doubt on the hypotheses of a linear Phillips curve and a symmetric quadratic loss function underlying traditional thinking on monetary policy. This paper analyzes the Barro-Gordon optimal monetary policy problem under alternative loss functions—including an asymmetric loss function corresponding to the “opportunistic approach” to disinflation—when the Phillips curve is convex. Numerical simulations are used to compare the implications of the alternative loss functions for equilibrium levels of inflation and unemployment. For parameter estimates relevant to the United States, the symmetric loss function dominates the asymmetric alternative.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 98/21.

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Length: 28
Date of creation: 01 Feb 1998
Date of revision:
Handle: RePEc:imf:imfwpa:98/21

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Cited by:
  1. Orlando Gomes & Diana A. Mendes & Vivaldo M. Mendes & José Sousa Ramos, 2006. "Endogenous Cycles in Optimal Monetary Policywith a Nonlinear Phillips Curve," Working Papers Series 1, ISCTE-IUL, Business Research Unit (BRU-IUL) ercwp1508, ISCTE-IUL, Business Research Unit (BRU-IUL).
  2. Kuzin, Vladimir, 2006. "The inflation aversion of the Bundesbank: A state space approach," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(9-10), pages 1671-1686.
  3. Nobay, A. R. & Peel, D. A., 2000. "Optimal monetary policy with a nonlinear Phillips curve," Economics Letters, Elsevier, Elsevier, vol. 67(2), pages 159-164, May.
  4. Buchmann, Marco, 2009. "Nonparametric Hybrid Phillips Curves Based on Subjective Expectations: Estimates for the Euro Area," Working Paper Series, European Central Bank 1119, European Central Bank.

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