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Do Asymmetric Central Bank Preferences Help Explain Observed Inflation Outcomes?

  • Matthew Doyle

    (Department of Economics, University of Waterloo)

  • Barry Falk

    (Department of Economics, James Madison University)

When the central banker’s loss function is asymmetric, changes in the volatility of inflation and/or unemployment affect equilibrium inflation. This suggests that changing macroeconomic volatilities may be an important driving force behind trends in observed inflation. Previous evidence, which has offered support for this idea, suffers from a spurious regression problem. Once this problem is controlled for, the evidence suggests that the volatility of unemployment does not help explain inflation outcomes. There is some evidence of a relationship between inflation and its volatility, but overall the data does not support the view that changing economic volatility, as filtered through asymmetric central bank preferences, is an important driver of inflation trends.

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Paper provided by University of Waterloo, Department of Economics in its series Working Papers with number 0902.

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Length: 31 pages
Date of creation: Feb 2009
Date of revision: Feb 2009
Handle: RePEc:wat:wpaper:0902
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