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Nonlinear Monetary Policy Reaction with Asymmetric Central Bank Preferences : Some Evidence for Korea

  • Kim, Sokwon
  • Seo, Byeongseon
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    The paper considers asymmetric central bank preferences and nonlinear AS curve in the monetary policy reaction function to examine nonlinear property of monetary policy rules. The optimal monetary policy rules are derived in a new Keynesian macroeconomic framework where the central bank has the asymmetric objective function. The derived reaction function explains the nonlinearr eaction to the inflation gap and the output gap. The nonlinearr eaction function is applied to explain the determination of the interest rate in Korea for the sample peroid of inflation targeting September 1998 to December 2005. The empirical evidence supports that the objective of the central bank is asymmetric in inflation management. The evidence of asymmetric reaction to the output gap is relatively weak. The empirical analysis reveals that the central bank responds strongly to the positive inflation gap compared to the negative inflation gap.

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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/16518/1/HJeco0490200910.pdf
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    Article provided by Hitotsubashi University in its journal Hitotsubashi Journal of Economics.

    Volume (Year): 49 (2008)
    Issue (Month): 2 (December)
    Pages: 91-108

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    Handle: RePEc:hit:hitjec:v:49:y:2008:i:2:p:91-108
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    1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
    2. 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, vol. 6(2), pages 1-22, July.
    3. 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.
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