Us Monetary Policy Rules: The Case for Asymmetric Preferences

38 Pages Posted: 4 Oct 2002

See all articles by Paolo Surico

Paolo Surico

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: September 2002

Abstract

This paper investigates the empirical relevance of a new framework for monetary policy analysis in which decision makers are allowed to weight differently positive and negative deviations of inflation and output from the target values. The specification of the central bank objective is general enough to nest the symmetric quadratic form as a special case, thereby making the derived policy rule potentially nonlinear. This forms the basis of our identification strategy which is used to develop a formal hypothesis testing for the presence of asymmetric preferences. Reduced-form estimates of postwar US policy rules indicate that the preferences of the Fed have been highly asymmetric in both inflation and output gaps, with the asymmetries on the latter becoming relatively more pronounced during the post-79 tenures.

Keywords: Nonlinear Optimal Monetary Policy Rules, Asymmetric Loss Function, Linearized Central Bank Euler Equation

JEL Classification: E32, E52

Suggested Citation

Surico, Paolo, Us Monetary Policy Rules: The Case for Asymmetric Preferences (September 2002). FEEM Working Paper No. 66.2002. Available at SSRN: https://ssrn.com/abstract=331740 or http://dx.doi.org/10.2139/ssrn.331740

Paolo Surico (Contact Author)

London Business School - Department of Economics ( email )

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HOME PAGE: http://sites.google.com/site/paolosurico

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

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