Optimal Monetary Policy with Asymmetric Preferences for Output
Using a model of an optimizing monetary authority which has preferences that weigh inflation and unemployment, Ruge-Murcia (2003, 2004) finds empirical evidence that the authority has asymmetric preferences for unemployment. We extend this model to weigh inflation and output and show that the empirical evidence using these series also supports an asymmetric preference hypothesis, only in our case, preferences are asymmetric for output. We also find evidence that the monetary authority targets potential output rather than some higher output level as would be the case in an extended Barro and Gordon (1983) model.
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- Ruge-Murcia, Francisco J., 2003.
"Does the Barro-Gordon model explain the behavior of US inflation? A reexamination of the empirical evidence,"
Journal of Monetary Economics,
Elsevier, vol. 50(6), pages 1375-1390, September.
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- 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.
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