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The Taming of the Skew: Asymmetric Inflation Risk and Monetary Policy

Author

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  • De Polis, Andrea
  • Melosi, Leonardo
  • Petrella, Ivan

Abstract

We document that inflation risk in the U.S. varies significantly over time and is often asymmetric. To analyze the first-order macroeconomic effects of these asymmetric risks within a tractable framework, we construct the beliefs representation of a general equilibrium model with skewed distribution of markup shocks. Optimal policy requires shifting agents' expectations counter to the direction of inflation risks. We perform counterfactual analyses using a quantitative general equilibrium model to evaluate the implications of incorporating real-time estimates of the balance of inflation risks into monetary policy communications and decisions.

Suggested Citation

  • De Polis, Andrea & Melosi, Leonardo & Petrella, Ivan, 2024. "The Taming of the Skew: Asymmetric Inflation Risk and Monetary Policy," CEPR Discussion Papers 19760, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19760
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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