Time-varying asymmetries in central bank preferences: The case of the ECB
This paper examines the asymmetric preferences of the European central bank (ECB) as identified by (Surico, 2007a) and (Surico, 2008). Under asymmetric preferences, a central banker places different weights on the losses associated with positive and negative deviations of economic variables such as inflation or output from their target values. Although asymmetry is conventionally estimated by the generalized method of moments, we use the bias correction Kalman filter suggested by Kim (2006), introducing the concept of time-varying asymmetry in central bank preferences. Estimates of the interest rate reaction functions suggest asymmetries in preferences for both output gap and interest rate. These asymmetries indicate that the ECB increases its interest rate aggressively when there is a surge in output but does not sustain an interest rate above its reference value.
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.:
- Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
- 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.
- RUGE-MURCIA, Francisco J., 2001. "The Inflation Bias When the Central Bank Targets, the Natural Rate of Unemployment," Cahiers de recherche 2001-22, Universite de Montreal, Departement de sciences economiques.
- Orphanides, Athanasios & Wilcox, David W, 2002.
"The Opportunistic Approach to Disinflation,"
Wiley Blackwell, vol. 5(1), pages 47-71, Spring.
- Lawrence J. Christiano & Terry J. Fitzgerald, 1999.
"The Band Pass Filter,"
NBER Working Papers
7257, National Bureau of Economic Research, Inc.
- 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.
- Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
- Paolo Surico, 2008.
"Measuring the Time Inconsistency of US Monetary Policy,"
London School of Economics and Political Science, vol. 75(297), pages 22-38, 02.
- Surico, Paolo, 2003. "Measuring the time-inconsistency of US monetary policy," Working Paper Series 0291, European Central Bank.
- Paolo Surico, 2004. "Measuring the time-inconsistency of US monetary policy," Money Macro and Finance (MMF) Research Group Conference 2003 96, Money Macro and Finance Research Group.
- Paolo Surico, 2004. "Measuring the Time-Inconsistency of US Monetary Policy," Macroeconomics 0401006, EconWPA.
- Alex Cukierman, 2002.
"Are contemporary central banks transparent about economic models and objectives and what difference does it make?,"
Federal Reserve Bank of St. Louis, issue Jul, pages 15-36.
- Cukierman, Alex, 2001. "Are Contemporary Central Banks Transparent about Economic Models and Objectives and What Difference Does it Make?," Discussion Paper Series 1: Economic Studies 2001,05, Deutsche Bundesbank, Research Centre.
- Kim, Chang-Jin & Nelson, Charles R., 2006. "Estimation of a forward-looking monetary policy rule: A time-varying parameter model using ex post data," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1949-1966, November.
- Paolo Surico, 2007. "The Monetary Policy of the European Central Bank," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(1), pages 115-135, 03.
- Alvaro Aguiar & Manuel Martins, 2008.
"Testing for asymmetries in the preferences of the euro-area monetary policymaker,"
Taylor & Francis Journals, vol. 40(13), pages 1651-1667.
- Alvaro Aguiar & Manuel M. F. Martins, 2005. "Testing for Asymmetries in the Preferences of the Euro-Area Monetary Policymaker," FEP Working Papers 182, Universidade do Porto, Faculdade de Economia do Porto.
- Manuel M F Martins & Alvaro Aguiar, 2005. "Testing for Asymmetries in the Preferences of the Euro-Area Monetary Policymaker," Money Macro and Finance (MMF) Research Group Conference 2005 41, Money Macro and Finance Research Group.
- Alex Cukierman & V. Anton Muscatelli, 2002. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability? - Theory and Evidence," CESifo Working Paper Series 764, CESifo Group Munich.
- 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, 07.
- Matthew Doyle & Barry Falk, 2009.
"Do Asymmetric Central Bank Preferences Help Explain Observed Inflation Outcomes?,"
0902, University of Waterloo, Department of Economics, revised Feb 2009.
- Doyle, Matthew & Falk, Barry, 2010. "Do asymmetric central bank preferences help explain observed inflation outcomes?," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 527-540, June.
- Doyle, Matthew & Falk, Barry L., 2006. "Do Asymmetric Central Bank Preferences Help Explain Observed Inflation Outcomes?," Staff General Research Papers 12501, Iowa State University, Department of Economics.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Jeremy Berkowitz & Lutz Kilian, 1996.
"Recent developments in bootstrapping time series,"
Finance and Economics Discussion Series
96-45, Board of Governors of the Federal Reserve System (U.S.).
- Artis, Michael J & Zhang, Wenda, 1995.
"International Business Cycles and the ERM: Is there a European Business Cycle?,"
CEPR Discussion Papers
1191, C.E.P.R. Discussion Papers.
- Artis, Michael J & Zhang, W, 1997. "International Business Cycles and the ERM: Is There a European Business Cycle?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(1), pages 1-16, January.
- Aksoy, Yunus & Orphanides, Athanasios & Small, David & Wieland, Volker & Wilcox, David, 2006.
"A quantitative exploration of the opportunistic approach to disinflation,"
Journal of Monetary Economics,
Elsevier, vol. 53(8), pages 1877-1893, November.
- Aksoy, Yunus & Orphanides, Athanasios & Small, David & Wieland, Volker & Wilcox, David, 2003. "A Quantitative Exploration of the Opportunistic Approach to Disinflation," CEPR Discussion Papers 4073, C.E.P.R. Discussion Papers.
- Aksoy, Yunus & Orphanides, Athanasios & Small, David & Wieland, Volker, 2005. "A quantitative exploration of the opportunistic approach to disinflation," CFS Working Paper Series 2005/19, Center for Financial Studies (CFS).
- Athanasios Orphanides & David H. Small & Volker Wieland & David W. Wilcox, 1997. "A quantitative exploration of the opportunistic approach to disinflation," Finance and Economics Discussion Series 1997-36, Board of Governors of the Federal Reserve System (U.S.).
- Kim, Chang-Jin, 2006. "Time-varying parameter models with endogenous regressors," Economics Letters, Elsevier, vol. 91(1), pages 21-26, April.
- �Zer Karagedikli & Kirdan Lees, 2007. "Do the Central Banks of Australia and New Zealand Behave Asymmetrically? Evidence from Monetary Policy Reaction Functions," The Economic Record, The Economic Society of Australia, vol. 83(261), pages 131-142, 06.
- 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, vol. 49(2), pages 485-503, February.
- Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
- Alex Cukierman & Anton Muscatelli, 2001. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability?," Working Papers 2002_4, Business School - Economics, University of Glasgow, revised Mar 2002.
- Marianne Baxter & Robert G. King, 1999.
"Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series,"
The Review of Economics and Statistics,
MIT Press, vol. 81(4), pages 575-593, November.
- Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
- Tom Doan, . "BKFILTER: RATS procedure to implement band pass filter using Baxter-King method," Statistical Software Components RTS00026, Boston College Department of Economics.
- 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.
- Paolo Surico, 2003. "Asymmetric Reaction Functions for the Euro Area," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 44-57.
When requesting a correction, please mention this item's handle: RePEc:eee:jmacro:v:32:y:2010:i:4:p:1054-1066. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.