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Inflation Targeting Under Asymmetric Preferences

  • RUGE-MURCIA, Francisco .J.

This paper develops and estimates a game-theoretical model of inflation targeting where the central banker's preferences are asymmetric around the targeted rate. In particular, positive deviations from the target can be weighted more, or less, severely than negative ones in the central banker's loss function. It is shown that some of the previous results derived under the assumption of symmetry are not robust to the generalization of preferences. Estimates of the central banker's preference parameters for Canada, Sweden, and the United Kingdom are statistically different from the ones implied by the commonly used quadratic loss function. Econometric results are robust to different forecasting models for the rate of unemployment but not to the use of measures of inflation broader than the one targeted.

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File URL: http://hdl.handle.net/1866/345
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Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2001-04.

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Length: 48 pages
Date of creation: 2001
Handle: RePEc:mtl:montde:2001-04
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