IDEAS home Printed from https://ideas.repec.org/p/mos/moswps/2009-32.html
   My bibliography  Save this paper

Optimal Interest Rate Rules Under One-Sided Output and Inflation Targets

Author

Listed:
  • Peter J. Stemp

Abstract

We investigate the derivation of optimal interest rate rules in a simple stochastic framework. The monetary authority chooses to minimise an asymmetric loss function, where the monetary authority places positive weight on negative (positive) deviations of output (inflation) and zero weight on positive (negative) deviations. Our focus is on deriving optimal interest rate rules in a series of special cases where shocks come from only one sector. We show that whether or not the optimal rules derived under asymmetric loss functions will be different than the optimal rules derived under symmetric loss functions is crucially dependent on the interest rate rule chosen. Under a fixed interest rate rule, the optimal rules differ. However, under a more flexible linear interest rate rule that incorporates additional information about contemporaneous shocks, the optimal rules are the same. The approach adopted here could be used, in conjunction with computational techniques, to calculate the precise coefficients of optimal interest rate rules derived from asymmetric preferences.

Suggested Citation

  • Peter J. Stemp, 2009. "Optimal Interest Rate Rules Under One-Sided Output and Inflation Targets," Monash Economics Working Papers 32-09, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2009-32
    as

    Download full text from publisher

    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2009/3209optimalintereststemp.pdf
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Peter J. Stemp, 2009. "Optimal Monetary Policy with Asymmetric Targets," Monash Economics Working Papers 33-09, Monash University, Department of Economics.

    More about this item

    Keywords

    Monetary Economics; Interest Rate Rule; Inflation Target; Output Target; Asymmetric Loss Function; One-sided Target; Semi-Variance.;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mos:moswps:2009-32. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Simon Angus). General contact details of provider: http://edirc.repec.org/data/dxmonau.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.