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Expected Social Welfare under a Convex Philips Curve and Asymmetric Policy Preferences

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  • Tambakis, Demosthenes N

Abstract

This paper evaluates the expected social welfare implications of monetary policy with a convex Phillips curve under a symmetric loss function and an asymmetric loss function corresponding to the "opportunistic approach" to disinflation. The convex-asymmetric specification yields an inaction range of inflation shocks for which the optimal monetary policy setting does not adjust. For parameter estimates relevant to the U.S., numerical simulations show that the symmetric loss function dominates the asymmetric alternative in expected social welfare terms. Asymmetric policy preferences enhance social welfare only under extreme parameter values. This result is robust to sensitivity analysis with respect to inflation variability and the degrees of Phillips curve convexity and preference asymmetry, thereby supporting arguments for a tough anti-inflationary stance by the Federal Reserve regardless of the "true" social loss function.

Suggested Citation

  • Tambakis, Demosthenes N, 2002. "Expected Social Welfare under a Convex Philips Curve and Asymmetric Policy Preferences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 434-449, May.
  • Handle: RePEc:mcb:jmoncb:v:34:y:2002:i:2:p:434-49
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    Cited by:

    1. Nurudeen Abu, 2019. "Inflation and Unemployment Trade-off: A Re-examination of the Phillips Curve and its Stability in Nigeria," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 13(1), March.
    2. Alvarez-Lois, Pedro P., 2004. "Capacity constraints, idiosyncratic demand uncertainty and the dynamics of inflation," Economics Letters, Elsevier, vol. 83(1), pages 15-21, April.
    3. Xu, Qifa & Niu, Xufeng & Jiang, Cuixia & Huang, Xue, 2015. "The Phillips curve in the US: A nonlinear quantile regression approach," Economic Modelling, Elsevier, vol. 49(C), pages 186-197.
    4. Tambakis Demosthenes N., 2009. "Optimal Monetary Policy with a Convex Phillips Curve," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-25, June.
    5. Pedro Pablo Álvarez Lois, 2003. "Capacity utilization and Monetary Policy," Working Papers 0306, Banco de España;Working Papers Homepage.

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