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The taming of the skew: asymmetric inflation risk and monetary policy

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

Abstract

We document that inflation risk in the U.S. varies significantly over time and is often asymmetric. To analyze the 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. JEL Classification: E52, E31, C53

Suggested Citation

  • Petrella, Ivan & De Polis, Andrea & Melosi, Leonardo, 2025. "The taming of the skew: asymmetric inflation risk and monetary policy," Working Paper Series 3028, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253028
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    More about this item

    Keywords

    asymmetric risks; balance of inflation risks; flexible average inflation targetin; optimal monetary policy; risk-adjusted inflation targeting;
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