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Central Bank Preferences, Distribution Forecasts and Economic Stability in a Small Open-economy


  • Alessandro Flamini

    () (Department of Economics, The University of Sheffield)


This paper relates the central bank's preferences on the inflation index and on the degree of smoothness of the interest rate to the quality of its forecasts and the expected perturbing impact of several shocks. The framework is a Markov jump-linear-quadratic system for optimal policy with model uncertainty in a timeless perspective. Comparing CPI and domestic inflation targeting, the latter implies considerably less variability in the distribution forecast of the economic dynamics. Furthermore, domestic inflation targeting stands out for much less sensitiveness to interest rate smoothing, and for resulting in more expected economic stability. Importantly, domestic inflation targeting allows significantly improving the prediction accuracy of the interest rate behaviour.

Suggested Citation

  • Alessandro Flamini, 2009. "Central Bank Preferences, Distribution Forecasts and Economic Stability in a Small Open-economy," Working Papers 2009005, The University of Sheffield, Department of Economics, revised Mar 2009.
  • Handle: RePEc:shf:wpaper:2009005

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    References listed on IDEAS

    1. Suleiman Abrar & Oliver Morrissey & Tony Rayner, 2004. "Aggregate agricultural supply response in Ethiopia: a farm-level analysis," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(4), pages 605-620.
    2. Jacoby, Hanan G., 1991. "Productivity of men and women and the sexual division of labor in peasant agriculture of the Peruvian Sierra," Journal of Development Economics, Elsevier, vol. 37(1-2), pages 265-287, November.
    3. Udry, Christopher, 1996. "Gender, Agricultural Production, and the Theory of the Household," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1010-1046, October.
    4. Savadogo, Kimseyinga & Reardon, Thomas & Pietola, Kyosti, 1995. "Mechanization and Agricultural Supply Response in the Sahel: A Farm-Level Profit Function Analysis," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 4(3), pages 336-377, December.
    5. Evers, Barbara & Walters, Bernard, 2000. "Extra-Household Factors and Women Farmers' Supply Response in Sub-Saharan Africa," World Development, Elsevier, vol. 28(7), pages 1341-1345, July.
    6. Quisumbing, Agnes R., 1996. "Male-female differences in agricultural productivity: Methodological issues and empirical evidence," World Development, Elsevier, vol. 24(10), pages 1579-1595, October.
    7. Warner, James M. & Campbell, D. A., 2000. "Supply Response in an Agrarian Economy with Non-Symmetric Gender Relations," World Development, Elsevier, vol. 28(7), pages 1327-1340, July.
    8. Suleiman Abrar & Oliver Morrissey & Tony Rayner, 2004. "Crop-Level Supply Response by Agro-Climatic Region in Ethiopia," Journal of Agricultural Economics, Wiley Blackwell, vol. 55(2), pages 289-311.
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    More about this item


    Inflation targeting; additive and multiplicative uncertainty; Markov jump linear quadratic systems; small open-economy; optimal monetary policy; central bank preferences;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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