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Monetary Policy with a Convex Phillips Curve and Asymmetric Loss

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  • Demosthenes N. Tambakis

Abstract

Recent theoretical and empirical work has cast doubt on the hypotheses of a linear Phillips curve and a symmetric quadratic loss function underlying traditional thinking on monetary policy. This paper analyzes the Barro-Gordon optimal monetary policy problem under alternative loss functions—including an asymmetric loss function corresponding to the “opportunistic approach” to disinflation—when the Phillips curve is convex. Numerical simulations are used to compare the implications of the alternative loss functions for equilibrium levels of inflation and unemployment. For parameter estimates relevant to the United States, the symmetric loss function dominates the asymmetric alternative.

Suggested Citation

  • Demosthenes N. Tambakis, 1998. "Monetary Policy with a Convex Phillips Curve and Asymmetric Loss," IMF Working Papers 98/21, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:98/21
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    References listed on IDEAS

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    Cited by:

    1. Tejada, César A. O. & Portugal, Marcelo S., 2002. "Credibility and Reputation: An Application of the External Circumstances Model for the Real Plan," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 56(4), October.
    2. Nobay, A. R. & Peel, D. A., 2000. "Optimal monetary policy with a nonlinear Phillips curve," Economics Letters, Elsevier, vol. 67(2), pages 159-164, May.
    3. Gross, Marco, 2009. "Nonparametric Hybrid Phillips Curves Based on Subjective Expectations: Estimates for the Euro Area," Working Paper Series 1119, European Central Bank.
    4. Arruda, Elano Ferreira & Ferreira, Roberto Tatiwa & Castelar, Ivan, 2011. "Modelos lineares e não lineares da curva de Phillips para previsão da taxa de Inflação no Brasil," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 65(3), September.
    5. Willi SEMMLER & Wenlang ZHANG, "undated". "Monetary Policy Rules with Nonlinear Philips Curve and Endogenous Nairu," EcoMod2004 330600128, EcoMod.
    6. Orlando Gomes & Diana A. Mendes & Vivaldo M. Mendes & José Sousa Ramos, 2006. "Endogenous Cycles in Optimal Monetary Policywith a Nonlinear Phillips Curve," Working Papers Series 1 ercwp1508, ISCTE-IUL, Business Research Unit (BRU-IUL).
    7. Kuzin, Vladimir, 2006. "The inflation aversion of the Bundesbank: A state space approach," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1671-1686.

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