Monetary Policy with a Convex Phillips Curve and Asymmetric Loss
IMF Working Papers, February 1, 1998
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Bibliographic details
- Authors: Demosthenes N. Tambakis
- Published: February 1, 1998
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451921717.001
Research question and context
- Investigates the Barro-Gordon optimal monetary policy problem when the Phillips curve is convex and when policymakers face alternative loss functions.
- Motivated by recent theoretical and empirical work casting doubt on the hypotheses of a linear Phillips curve and a symmetric quadratic loss function that underlie traditional monetary policy analysis.
- Considers an asymmetric loss function corresponding to the “opportunistic approach” to disinflation.
Methods and approach
- Analytical treatment of the optimal policy problem under alternative loss functions, including a specifically defined asymmetric loss.
- Numerical simulations are used to compare the implications of the alternative loss functions for equilibrium levels of inflation and unemployment.
Key findings
- Numerical simulations compare equilibrium inflation and unemployment under different loss functions and a convex Phillips curve.
- For parameter estimates relevant to the United States, the symmetric loss function dominates the asymmetric alternative.
Policy implications and interpretation
- Results suggest that, at least for U.S.-relevant parameterizations, maintaining a symmetric loss specification leads to better outcomes (in the sense used in the analysis) than adopting the asymmetric “opportunistic approach” to disinflation when the Phillips curve is convex.
- The paper highlights the importance of jointly considering the shape of the Phillips curve and the form of the policymaker’s loss function when deriving optimal monetary policy prescriptions.
Subjects and keywords (as provided)
- Subjects: Inflation, Inflation targeting, Labor, Monetary policy, Monetary tightening, Prices, Unemployment, Unemployment rate
- Keywords: Asymmetric loss functions, aversion parameter, inaction range, Inflation, inflation aversion coefficient, inflation bias, inflation increase, inflation shock, Inflation targeting, loss function, monetary policy, Monetary tightening, Phillips curve, shock distribution, shock realization, Unemployment, Unemployment rate, WP
Monetary Policy with a Convex Phillips Curve and Asymmetric Loss — Demosthenes N. Tambakis (February 1, 1998).
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- Monetary Policy with a Convex Phillips Curve and Asymmetric Loss -WP/98/21