Advanced Search
MyIDEAS: Login to save this paper or follow this series

Do Asymmetric Central Bank Preferences Help Explain Observed Inflation Outcomes?

Contents:

Author Info

  • Matthew Doyle

    (Department of Economics, University of Waterloo)

  • Barry Falk

    (Department of Economics, James Madison University)

Abstract

When the central banker’s loss function is asymmetric, changes in the volatility of inflation and/or unemployment affect equilibrium inflation. This suggests that changing macroeconomic volatilities may be an important driving force behind trends in observed inflation. Previous evidence, which has offered support for this idea, suffers from a spurious regression problem. Once this problem is controlled for, the evidence suggests that the volatility of unemployment does not help explain inflation outcomes. There is some evidence of a relationship between inflation and its volatility, but overall the data does not support the view that changing economic volatility, as filtered through asymmetric central bank preferences, is an important driver of inflation trends.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://economics.uwaterloo.ca/documents/AsymmetricDoyle_000.pdf
Download Restriction: no

Bibliographic Info

Paper provided by University of Waterloo, Department of Economics in its series Working Papers with number 0902.

as in new window
Length: 31 pages
Date of creation: Feb 2009
Date of revision: Feb 2009
Handle: RePEc:wat:wpaper:0902

Contact details of provider:
Postal: Waterloo, Ontario, N2L 3G1
Phone: (519) 888-4567 ext 33695
Fax: (519) 725-0530
Web page: http://economics.uwaterloo.ca/
More information through EDIRC

Related research

Keywords: Inflation; Monetary Policy; Asymmetric Loss Function.;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. A. Robert Nobay & David A. Peel, 2003. "Optimal Discretionary Monetary Policy in a Model of Asymmetric Central Bank Preferences," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(489), pages 657-665, 07.
  2. Ruge-Murcia, F.J., 2001. "Inflation Targeting Under Asymmetric Preferences," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 2001-04, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  3. Kenneth S. Rogoff, 2003. "Globalization and global disinflation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 77-112.
  4. RUGE-MURCIA, Francisco J., 2001. "A Prudent Central Banker," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2001-07, Universite de Montreal, Departement de sciences economiques.
  5. Cukierman, Alex & Gerlach, Stefan, 2003. "The Inflation Bias Revisited: Theory and Some International Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3761, C.E.P.R. Discussion Papers.
  6. Romer, David, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(4), pages 869-903, November.
  7. Christopher Martin & Costas Milas, 2004. "Modelling Monetary Policy: Inflation Targeting in Practice," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 71(281), pages 209-221, 05.
  8. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  9. DOLADO, J.J. & MARIA-DOLORES, R. & RUGE-MURCIA, Francisco J., 2003. "Nonlinear Monetary Policy Rules: Some New Evidence for the U.S," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 18-2003, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  10. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, American Economic Association, vol. 63(3), pages 326-34, June.
  11. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  12. Kim, Dong Heon & Denise R Osborn & Marianne Sensier, 2003. "Nonlinearity in the Fed's Monetary Policy Rule," Royal Economic Society Annual Conference 2003, Royal Economic Society 121, Royal Economic Society.
  13. Matthew Doyle & Barry Falk, 2008. "Testing Commitment Models of Monetary Policy: Evidence from OECD Economies," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 40(2-3), pages 409-425, 03.
  14. Alex Cukierman & Anton Muscatelli, 2001. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability?," Working Papers, Business School - Economics, University of Glasgow 2002_4, Business School - Economics, University of Glasgow, revised Mar 2002.
  15. Bec Frédérique & Ben Salem Mélika & Collard Fabrice, 2002. "Asymmetries in Monetary Policy Reaction Function: Evidence for U.S. French and German Central Banks," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, De Gruyter, vol. 6(2), pages 1-22, July.
  16. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 633-663, April.
  17. Alan S. Blinder, 1997. "Distinguished Lecture on Economics in Government: What Central Bankers Could Learn from Academics--And Vice Versa," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(2), pages 3-19, Spring.
  18. RUGE-MURCIA, Francisco J., 2001. "The Inflation Bias When the Central Bank Targets, the Natural Rate of Unemployment," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2001-22, Universite de Montreal, Departement de sciences economiques.
  19. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  20. Ciccarelli, Matteo & Mojon, Benoît, 2005. "Global inflation," Working Paper Series, European Central Bank 0537, European Central Bank.
  21. James H. Stock & Mark W. Watson, 2003. "Has the business cycle changed?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 9-56.
  22. Dolado, Juan J. & Maria-Dolores, Ramon & Naveira, Manuel, 2005. "Are monetary-policy reaction functions asymmetric?: The role of nonlinearity in the Phillips curve," European Economic Review, Elsevier, Elsevier, vol. 49(2), pages 485-503, February.
  23. Surico, Paolo, 2007. "The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(1), pages 305-324, January.
  24. Gerlach, Stefan, 2003. "Recession aversion, output and the Kydland-Prescott Barro-Gordon model," Economics Letters, Elsevier, Elsevier, vol. 81(3), pages 389-394, December.
  25. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, American Economic Association, vol. 96(1), pages 54-81, March.
  26. Musso, Alberto & Stracca, Livio & van Dijk, Dick, 2007. "Instability and nonlinearity in the euro area Phillips curve," Working Paper Series, European Central Bank 0811, European Central Bank.
  27. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 95-02, Federal Reserve Bank of San Francisco.
  28. Jan-Egbert Sturm & Jakob de Haan, 2001. "Inflation in Developing Countries: Does Central Bank Independence Matter?," CESifo Working Paper Series 511, CESifo Group Munich.
  29. Marta Campillo & Jeffrey A. Miron, 1996. "Why Does Inflation Differ Across Countries?," NBER Working Papers 5540, National Bureau of Economic Research, Inc.
  30. Cukierman, A. & Webb, S., 1994. "Political Influence on the Central Bank : International Evidence," Discussion Paper, Tilburg University, Center for Economic Research 1994-100, Tilburg University, Center for Economic Research.
  31. Alvaro Aguiar & Manuel Martins, 2008. "Testing for asymmetries in the preferences of the euro-area monetary policymaker," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 40(13), pages 1651-1667.
  32. Peter N. Ireland, 1998. "Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?," Boston College Working Papers in Economics, Boston College Department of Economics 415, Boston College Department of Economics.
  33. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc.
  34. Charles Goodhart, 1998. "Central Bankers and Uncertainty," FMG Special Papers, Financial Markets Group sp106, Financial Markets Group.
  35. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
  36. Paolo Surico, 2004. "Inflation Targeting and Nonlinear Policy Rules: The Case of Asymmetric Preferences (new title: The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences)," CESifo Working Paper Series 1280, CESifo Group Munich.
  37. Paolo Surico, 2003. "Asymmetric Reaction Functions for the Euro Area," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 19(1), pages 44-57.
  38. Patrick Minford & Naveen Srinivasan, 2008. "Are Central Bank Preferences Asymmetric? A Comment," Economic Notes, Banca Monte dei Paschi di Siena SpA, Banca Monte dei Paschi di Siena SpA, vol. 37(1), pages 119-126, 02.
  39. Laxton, Douglas & Rose, David & Tambakis, Demosthenes, 1999. "The U.S. Phillips curve: The case for asymmetry," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 23(9-10), pages 1459-1485, September.
  40. James G. MacKinnon & Alfred A. Haug & Leo Michelis, 1996. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Working Papers, York University, Department of Economics 1996_07, York University, Department of Economics.
  41. Bruinshoofd, Allard & Candelon, Bertrand, 2005. "Nonlinear monetary policy in Europe: fact or myth?," Economics Letters, Elsevier, Elsevier, vol. 86(3), pages 399-403, March.
  42. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 451-72, June.
  43. Athanasios Orphanides, 2002. "Monetary policy rules and the Great Inflation," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2002-8, Board of Governors of the Federal Reserve System (U.S.).
  44. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
  45. Paolo Surico, 2004. "Inflation Targeting and Nonlinear Policy Rules: the Case of Asymmetric Preferences," Econometric Society 2004 Latin American Meetings, Econometric Society 8, Econometric Society.
  46. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262522608, December.
  47. Giorgio Primiceri, 2005. "Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy," NBER Working Papers 11147, National Bureau of Economic Research, Inc.
  48. Ruge-Murcia, Francisco J., 2003. "Does the Barro-Gordon model explain the behavior of US inflation? A reexamination of the empirical evidence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(6), pages 1375-1390, September.
  49. Alvaro Aguiar & Manuel Martins, 2005. "Testing the significance and the non-linearity of the Phillips trade-off in the Euro Area," Empirical Economics, Springer, Springer, vol. 30(3), pages 665-691, October.
  50. Özer Karagedikli & Kirdan Lees, 2004. "Do inflation targeting central banks behave asymmetrically? Evidence from Australia and New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP 2004/02, Reserve Bank of New Zealand.
  51. Beck, Thorsten & Clarke, George & Groff, Alberto & Keefer, Philip & Walsh, Patrick, 2000. "New tools and new tests in comparative political economy - the database of political institutions," Policy Research Working Paper Series, The World Bank 2283, The World Bank.
  52. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  53. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, Elsevier, vol. 42(3-4), pages 327-347, May.
  54. Cukierman, A., 1999. "The Inflation Bias Result Revisited," Papers, Tel Aviv 38-99, Tel Aviv.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Ikeda, Taro, 2010. "Time-varying asymmetries in central bank preferences: The case of the ECB," Journal of Macroeconomics, Elsevier, Elsevier, vol. 32(4), pages 1054-1066, December.
  2. Fabián Gredig, 2007. "Asymmetric Monetary Policy Rules and the Achievement of the Inflation Target: The Case of Chile," Working Papers Central Bank of Chile, Central Bank of Chile 451, Central Bank of Chile.
  3. López-Villavicencio, Antonia, 2013. "Interest rates, government purchases and the Taylor rule in recessions and expansions," Journal of Macroeconomics, Elsevier, Elsevier, vol. 38(PB), pages 382-392.
  4. Laban K. Chesang & Ruthira Naraidoo, 2014. "Parameter Uncertainty and Inflation Dynamics in a Model with Asymmetric Central Bank Preferences," Working Papers 201437, University of Pretoria, Department of Economics.
  5. Osama D. Sweidan, 2009. "Asymmetric central bank's preference and inflation rate in Jordan," Studies in Economics and Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 26(4), pages 232-245, October.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:wat:wpaper:0902. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Pat Gruber).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.