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Time variation in an optimal asymmetric preference monetary policy model

Author

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  • Cassou Steven P.

    (Department of Economics, Kansas State University, 327 Waters Hall, Manhattan, KS 66506, USA)

  • Vázquez Jesús

    (Department of Economic Analysis Foundations II, School of Economics and Business, The University of the Basque Country (UPV/EHU), Av. Lehendakari Aguirre 83, 48015 Bilbao, Spain)

Abstract

This paper considers a time varying parameter extension of the Ruge-Murcia’s (Ruge-Murcia, F. J. 2003. “Does the Barro-Gordon Model Explain the Behavior of us Inflation? A Reexamination of the Empirical Evidence.” Journal of Monetary Economics 50: 1375–1390; Ruge-Murcia, F. J. 2004. “The Inflation Bias When the Central Bank Targets the Natural Rate of Unemployment.” European Economic Review 48: 91–107.) model to explore whether some of the variation in parameter estimates seen in the literature could arise from this source. A time varying value for the unemployment volatility parameter can be motivated through several means including variation in the slope of the Phillips curve or variation in the preferences of the monetary authority. We show that allowing time variation for the coefficient on the unemployment volatility parameter improves the model fit and it helps to provide an explanation of inflation bias based on asymmetric central banker preferences, which is consistent across subsamples.

Suggested Citation

  • Cassou Steven P. & Vázquez Jesús, 2014. "Time variation in an optimal asymmetric preference monetary policy model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(1), pages 41-49, February.
    • Handle: RePEc:bpj:sndecm:v:18:y:2014:i:1:p:41-49:n:4
    DOI: 10.1515/snde-2013-0021
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    References listed on IDEAS

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    1. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 99-112, June.
    2. 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, vol. 50(6), pages 1375-1390, September.
    3. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    4. Cassou Steven P. & Vázquez Jesús, 2014. "Time variation in an optimal asymmetric preference monetary policy model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(1), pages 41-49, February.
    5. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    6. Laurence Ball & Sandeep Mazumder, 2011. "Inflation Dynamics and the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 337-405.
    7. A. Robert Nobay & David A. Peel, 2003. "Optimal Discretionary Monetary Policy in a Model of Asymmetric Central Bank Preferences," Economic Journal, Royal Economic Society, vol. 113(489), pages 657-665, July.
    8. Ruge-Murcia, Francisco J., 2004. "The inflation bias when the central bank targets the natural rate of unemployment," European Economic Review, Elsevier, vol. 48(1), pages 91-107, February.
    9. Ireland, Peter N., 1999. "Does the time-consistency problem explain the behavior of inflation in the United States?," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 279-291, October.
    10. Andrew Atkeson & Lee E. Ohanian, 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 25(Win), pages 2-11.
    11. 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, vol. 31(1), pages 305-324, January.
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    Cited by:

    1. Cassou Steven P. & Vázquez Jesús, 2014. "Time variation in an optimal asymmetric preference monetary policy model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(1), pages 41-49, February.
    2. Aguirre, Idoia & Vázquez, Jesús, 2018. "Inflation monitoring in real time: A comparative analysis of the Federal Reserve and the Bank of England," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 200-209.
    3. Steven P. Cassou & C. Patrick Scott & Jesús Vázquez, 2018. "Optimal monetary policy revisited: does considering US real-time data change things?," Applied Economics, Taylor & Francis Journals, vol. 50(57), pages 6203-6219, December.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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