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Optimal Monetary Policy in a Model of Asymmetric Central Bank Preferences

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  • A. Robert Nobay
  • David A. Peel

Abstract

This paper considers optimal monetary in the context of the central bank adopting a asymmetric objective function. We exploit a procedure, due to Varian and Zellner, to derive policies under commitment and discretion. Our results show that under asymmetric preferences, many of the extant results on the time consistency problem no longer hold. A striking feature of the optimal policy solutions is that a committed policymaker is not unambiguously preferred to his discretionary counterpart. Moreover, the form of the optimal discretionary solution indicates that the usual mechanisms to eliminate the inflation bias are inappropriate.

Suggested Citation

  • A. Robert Nobay & David A. Peel, 1998. "Optimal Monetary Policy in a Model of Asymmetric Central Bank Preferences," FMG Discussion Papers dp306, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp306
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp306.pdf
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    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    2. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
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