Nonlinear Phillips Curves, Mixing Feedback Rules and the Distribution of Inflation and Output
Optimal nominal interest rate rules are usually set assuming that the underlying world is linear. In this paper we consider the performance of optimal rules when the underlying relationship between inflation and the output gap may be nonlinear. In particular if the inflation-output trade off exhibits nonlinearities this will impart a bias to inflation when a linear rule is used. By deriving some analytical results for the higher moments and in particular the skewness of the distribution of output and inflation, we show that the sign of the skewness of the distribution of inflation and output depends upon the nature of the nonlinearity. For the convex modified hyperbolic function used by Chadha et al. (1992) and Schaling (1999) inflation is positively and output negatively skewed. Whereas, if a concave-convex form is used the skewness of inflation and output is reversed. To correct this bias we propose a piecewise linear rule, which can be thought of as an approximation to the nonlinear rule of Schaling (1999). In order to evaluate the relevance of these results, we turn to some illustrative empirical results for the US and the UK. We show that this reduces the bias, but at the expense of an increase in the volatility of the nominal interest rate.
|Date of creation:||23 Oct 2003|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.ceistorvergata.it
More information through EDIRC
|Order Information:|| Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma|
Web: http://www.ceistorvergata.it Email:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Svensson, L-E-O, 1996.
"Inflation Forecast Targeting : Implementaing and Monitoring Inflation Targets,"
615, Stockholm - International Economic Studies.
- Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
- Lars E. O. Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," NBER Working Papers 5797, National Bureau of Economic Research, Inc.
- Svensson, Lars E O, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," CEPR Discussion Papers 1511, C.E.P.R. Discussion Papers.
- Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers 56, Bank of England.
- Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers 615, Stockholm University, Institute for International Economic Studies.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999.
"The Science of Monetary Policy: A New Keynesian Perspective,"
CEPR Discussion Papers
2139, C.E.P.R. Discussion Papers.
- Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
- Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
- Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
- Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
- Corrado Luisa & Holly Sean & Turner Paul, 2002. "Nonlinearities and Inactivity in Aggregate Investment: Some Theoretical Analysis and Time-Series Evidence," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(4), pages 1-21, January.
- Peter B. Clark & Douglas Laxton & David Rose, 1995. "Capacity Constraints, Inflation and the Transmission Mechanism; Forward-Looking Versus Myopic Policy Rules," IMF Working Papers 95/75, International Monetary Fund.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- McCallum, Bennett T., 1999.
"Issues in the design of monetary policy rules,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530
- Mojon, Benoît & Kashyap, Anil K. & Angeloni, Ignazio & Terlizzese, Daniele, 2002. "Monetary Transmission in the Euro Area : Where Do We Stand?," Working Paper Series 0114, European Central Bank.
- Jeff Fuhrer & Arturo Estrella, 1999.
"Are 'Deep' Parameters Stable? The Lucas Critique as an Empirical Hypothesis,"
Computing in Economics and Finance 1999
621, Society for Computational Economics.
- Arturo Estrella & Jeffrey C. Fuhrer, 1999. "Are "deep" parameters stable? the Lucas critique as an empirical hypothesis," Working Papers 99-4, Federal Reserve Bank of Boston.
- CHADHA, Jagjit & SCHELLEKENS, Philip, .
"Monetary policy loss functions: two cheers for the quadratic,"
1999002, University of Antwerp, Faculty of Applied Economics.
- Schellekens, P. & Chadha, J.S., 1999. "Monetary Policy Loss Functions: Two Cheers for the Quadratic," Cambridge Working Papers in Economics 9920, Faculty of Economics, University of Cambridge.
- Jagjit Chadha & Philip Schellekens, 1999. "Monetary policy loss functions: two cheers for the quadratic," Bank of England working papers 101, Bank of England.
- Guy Meredith & Bankim Chadha & Paul R. Masson, 1991.
"Models of Inflation and the Costs of Disinflation,"
IMF Working Papers
91/97, International Monetary Fund.
- Marvin Goodfriend & Robert G. King, 1998.
"The new neoclassical synthesis and the role of monetary policy,"
98-05, Federal Reserve Bank of Richmond.
- Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
- Bean, Charles, 1998. "The New UK Monetary Arrangements: A View from the Literature," Economic Journal, Royal Economic Society, vol. 108(451), pages 1795-1809, November.
- Douglas Laxton & Guy Meredith & David Rose, 1994.
"Asymmetric Effects of Economic Activityon Inflation; Evidence and Policy Implications,"
IMF Working Papers
94/139, International Monetary Fund.
- Douglas Laxton & Guy Meredith & David Rose, 1995. "Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 344-374, June.
- repec:cup:cbooks:9780521264440 is not listed on IDEAS
- Cook, Steven & Holly, Sean & Turner, Paul, 1999. "The power of tests for non-linearity: the case of Granger-Lee asymmetry," Economics Letters, Elsevier, vol. 62(2), pages 155-159, February.
- Joshua Aizenman & Ricardo Hausmann, 1994. "Why is Inflation Skewed? A Debt and Volatility Story," NBER Working Papers 4837, National Bureau of Economic Research, Inc.
- Douglas Laxton & Guy Debelle, 1996.
"Is the Phillips Curve Really a Curve? Some Evidence for Canada, the United Kingdom, and the United States,"
IMF Working Papers
96/111, International Monetary Fund.
- Guy Debelle & Douglas Laxton, 1997. "Is the Phillips Curve Really a Curve? Some Evidence for Canada, the United Kingdom, and the United States," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 249-282, June.
- Granger, C W J & Lee, T H, 1989. "Investigation of Production, Sales and Inventory Relationships Using Multicointegration and Non-symmetric Error Correction Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(S), pages S145-59, Supplemen.
- Fair Ray C, 2002.
"On Modeling the Effects of Inflation Shocks,"
The B.E. Journal of Macroeconomics,
De Gruyter, vol. 2(1), pages 1-21, April.
- Holly, S. & Zarrop, M. B., 1983. "On optimality and time consistency when expectations are rational," European Economic Review, Elsevier, vol. 20(1-3), pages 23-40, January.
- Andrew J. Filardo, 1998. "New evidence on the output cost of fighting inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q III.
- Eric Schaling, 1999. "The non-linear Phillips curve and inflation forecast targeting," Bank of England working papers 98, Bank of England.
- Alvaro Escribano & Santiago Mira, 2001. "Nonlinear error correction models," Documentos de trabajo conjunto ULL-ULPGC 2001-03, Facultad de Ciencias Económicas de la ULPGC.
- John B. Taylor, 1994. "The inflation/output variability trade-off revisited," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 21-24.
- Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
- Escribano, Alvaro & Pfann, Gerard A., 1998. "Non-linear error correction, asymmetric adjustment and cointegration," Economic Modelling, Elsevier, vol. 15(2), pages 197-216, April.
- Bianchi, Carlo & Calzolari, Giorgio & Corsi, Paolo, 1978. "A Program for Stochastic Simulation of Econometric Models," Econometrica, Econometric Society, vol. 46(1), pages 235-36, January.
When requesting a correction, please mention this item's handle: RePEc:rtv:ceisrp:37. 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: (Barbara Piazzi)
If references are entirely missing, you can add them using this form.