Are Central Bank Preferences Asymmetric? A Comment

8 Pages Posted: 24 Apr 2008

See all articles by Patrick Minford

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Naveen Srinivasan

Cardiff University Business School

Abstract

A recent paper by Ruge-Murcia (2004) on asymmetric central bank objectives provides a new perspective on the policy roots of inflation in developed economies. More precisely, the paper demonstrates that if the distribution of the supply shocks is normal, then the reduced-form solution for inflation implies a positive (or negative) relation between average inflation and the variance of shocks. We argue that the evidence offered in support of this hypothesis suffers from lack of identification because Phillips curve nonlinearity combined with quadratic central bank preferences yield the same reduced-form solution for inflation. If so, estimating reduced form for inflation will not be able to discriminate between these models. Yet they have quite different implications for policy. Other, structural, evidence is needed.

Suggested Citation

Minford, Patrick and Srinivasan, Naveen K., Are Central Bank Preferences Asymmetric? A Comment. Economic Notes, Vol. 37, Issue 1, pp. 119-126, February 2008. Available at SSRN: https://ssrn.com/abstract=1124632 or http://dx.doi.org/10.1111/j.1468-0300.2008.00191.x

Patrick Minford (Contact Author)

Cardiff University Business School ( email )

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+44 29 2087 5728 (Phone)
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Naveen K. Srinivasan

Cardiff University Business School ( email )

Colum Drive
Aberconway Building
Cardiff CF10 3EU
United Kingdom
+44 029 2087 6545 (Phone)
+44 029 2087 4419 (Fax)

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