Monetary policy with a convex Phillips curve and asymmetric loss.

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International Monetary Fund , Washington, D.C
SeriesIMF working paper -- WP/98/21
ContributionsInternational Monetary Fund.
The Physical Object
Pagination28 p. ;
ID Numbers
Open LibraryOL18071104M

Recent theoretical and empirical work has cast doubt on the hypotheses of a linear Phillips curve and a symmetric quadratic loss function underlying traditional thinking on monetary policy. This paper analyzes the Barro-Gordon optimal monetary policy problem under alternative loss functions—including an asymmetric loss function corresponding to the opportunistic Cited by: 1.

Monetary Policy with a Convex Phillips Curve and Asymmetric Loss Prepared by Demosthenes N. Tambakis* Authorized for distribution by Peter Isard February Abstract Recent theoretical and empirical work has cast doubt on the hypotheses of a linear Phillips curve and a symmetric quadratic loss function underlying traditional thinking on monetary.

Title: Monetary Policy with a Convex Phillips Curve and Asymmetric Loss -WP/98/ 21 Created Date: 3/13/ AM. Get this from a library. Monetary policy with a convex Phillips curve and asymmetric loss.

[Demosthenes N Tambakis; International Monetary Fund. Research Department,] -- Recent empirical contributions to the monetary policy literature have argued that the short-run Phillips curve in several developed countries is moderately convex, such that at any given point on the.

Monetary Policy with a Convex Phillips Curve and Asymmetric Loss. This paper analyzes the Barro-Gordon optimal monetary policy problem under alternative loss functions—including an asymmetric loss function corresponding to the “opportunistic approach” to disinflation—when the Phillips curve is convex.

Numerical simulations are Monetary policy with a convex Phillips curve and asymmetric loss. book Author: Demosthenes N. Tambakis. This paper evaluates the expected social welfare implications of monetary policy with a convex Phillips curve under a symmetric loss function and an asymmetric loss function corresponding to the "opportunistic approach" to disinflation.

The convex-asymmetric specification yields an inaction range of inflation shocks for which the optimal monetary policy setting does not adjust. Optimal Monetary Policy with a Convex Phillips Curve and the loss is zero for negative unemployment Subsequently, students of monetary policy have been exploring the nonlinear reaction functions arising from asymmetric policy preferences, and empirical support has been found for the U.S., G7 and OECD countries by Ruge.

This paper studies the one-period optimal monetary policy problem under an asymmetric loss function corresponding to the "opportunistic approach" to disinflation and a convex Phillips curve.

The policy-inaction range and its properties are derived analytically. This paper investigates the implications of a nonlinear Phillips curve for the derivation of optimal monetary policy rules.

Combined with a quadratic loss function, the optimal policy is also nonlinear, with the policy-maker increasing interest rates by a larger amount when inflation or output are above target than the amount it will reduce them when they are below target.

1. Introduction. Since the seminal work by Mitchell (), considerable effort has been devoted to examine non-linearities in macroeconomic time series. Graham (), Keynes () and Friedman and Schwartz () have then stimulated a vast debate on the asymmetric effects of monetary policy.

Widespread empirical evidence has been produced in support of the view that monetary policy. This paper studies the one-period optimal monetary policy problem under an asymmetric loss function corresponding to the "opportunistic approach" to disinflation and a convex Phillips curve.

The. As noted in the Introduction, the linear monetary policy rules used by many authors are based on the assumption that the central bank has a quadratic loss function and the aggregate supply relation (Phillips curve) is linear2.

These linear rules do quite well in describing monetary policy as implemented in many countries, including. Are monetary-policy reaction functions asymmetric?: The role of nonlinearity in the sumption of a quadratic loss function byacknowledging the possibilitythat central banks mayhave asymmetric preferences with respect to ination and/or output gaps.

However, if the Phillips curve is convex (¿0), then the future inationarypressure caused. The results are in line with recent theoretical work on asymmetric loss functions and the conduct of monetary policy given a convex Phillips curve relation.

Yet, since there is an ambiguity as to how certain nonlinearities possibly present in the Phillips curve may. monetary policy with a convex Phillips curve under a symmetric loss function and an asymmetric loss function corresponding to the "opportunistic approach" to disinflation.

The convex-asymmetric specification yields an inaction range of inflation shocks for which the optimal monetary policy setting does not adjust. For parameter. The Nonlinear Phillips Curve and Inflation Forecast Targeting-Symmetric versus Asymmetric Monetary Policy Rules Eric Schaling* 1 * Department of Economics, RAU, PO BoxAuckland Park, Johannesburg, Republic of South Africa December Abstract We extend the Svensson (a) inflation forecast targeting framework with a convex.

studies the one-period optimal monetary policy problem under an asymmetric loss function corresponding to the “opportunistic approach” to disinflation and a convex Phillips curve.

The policy-inaction range and its properties are derived analytically. Numerical simulations are then used to assess the implications of.

the slope of the Phillips curve, and is thus a function of the output gap. The policy rule is a generalisation of the Taylor rule, which is obtained if the Phillips curve is linear, in which case gy() 1t.

The response of interest rates to inflation reflects the shape of the Phillips curve. The Phillips curve is convex if 1 PC β. Testing the Nonlinearity of the Phillips Curve. Implications for Monetary Policy path-dependent. An extreme form of convexity is an asymmetric curve, where inflation reacts to excess demand only if the latter is above a certain level.

It is worth noting that, in fact, the relationship initially proposed by Phillips was, indeed, a curve. In particular, the Phillips curve is estimated to be convex, with a higher slope in the region of the positive output gap than in the region of the negative one (Latxon et al.,and Alvarez Lois,for the USA; Dolado et.

al.,for several European countries)2. Such a non-linear Phillips curve reflects asymmetric.

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**Phillips curve model** | a graphical model showing the relationship between unemployment and inflation using the short-run Phillips curve and the long-run Phillips curve **short-run Phillips curve (“SPRC)** | a curve illustrating the inverse short-run relationship between the unemployment rate and the inflation rate **long-run Phillips curve (“LRPC”)** | a curve illustrating that there.

The policymaker sees the Phillips curve as the feasible set and will try to use monetary or fiscal policy to choose the level of aggregate demand so that employment is at C.

This is the indifference curve closest to the best outcome of F, which is consistent with the Phillips curve trade-off. framework with a convex Phillips curve.

An asymmetric target rule is derived, which implies a higher level of nominal interest rates than the monetary policy, inflation targeting may reduce the inflation bias of discretionary policy. See The expected value of the discounted loss can be written as:(26) E L E E E Var E t t t t t t t t t t.

Monetary Policy with a Convex Phillips Curve and Asymmetric Loss. The Asymmetric Effects of Monetary Policy in General Equilibrium. in combination with a convex Phillips curve.

CiteSeerX - Document Details (Isaac Councill, Lee Giles, Pradeep Teregowda): This paper shows that convexity of the short-run Phillips curve is a source of positive inflation bias even when policymakers target the natural unemployment rate, that is when they operate with pru-dent discretion, and their loss function is symmetric.

Optimal mon-etary policy also induces positive co-movement. of Phillips curve [15] [18] or to study the impact of globalization on the Phillips curve or inflation in the pers-pective of a linear or flatter Phillips curve [5] [13].

This leaves the lacuna to study the impact of openness in the presence of a convex Phill ips curve, and the analysis of this curb is the subject matter and main contribution of.

policy rule under the general case of asymmetric preferences and a convex aggregate supply curve, and compares it to several relevant subcases. Section 3 estimates the nonlinear rule for the US, distinguishing between the two relevant subperiods and using a wide array of alternative specification to check the robustness of the results.

central bank’s preferences and non-linear Phillips curve to derive the optimal interest rate rule for a closed economy, and they come to a similar conclusion.

The theoretical prediction that monetary policy is non-linear is tested empirically, but the evidence is mixed. Some papers confirm that monetary policy is asymmetric indeed (Dolado et. The Instability of the Phillips Curve. During the s, the Phillips curve was seen as a policy menu.

A nation could choose low inflation and high unemployment, or high inflation and low unemployment, or anywhere in between. Fiscal and monetary policy could be used to move up or down the Phillips curve as desired.

Details Monetary policy with a convex Phillips curve and asymmetric loss. PDF

Then a curious thing happened. Phillips curve in industrial countries (Laxton, Meredith, and Rose ()), ()), provides support for this type of asymmetric effects. In a small open economy context, the assumption of a convex short-run aggregate supply of nontradable goods helps to explain an asymmetric rela- Monetary policy may also have asymmetric.

In this instance, the nonlinearity of the Phillips curve solely generates asymmetric monetary policy effects. According to the graph, when the deviations in output result from demand shocks, inflation responds more and output responds less in an expansion than in a recession, which is consistent with a convex Phillips curve.

Description Monetary policy with a convex Phillips curve and asymmetric loss. EPUB

The Basis of the Curve Phillips developed the curve based on empirical evidence. He studied the correlation between the unemployment rate and wage inflation in .the Phillips curve. In the monopolistic competitive model, for example, the reduced sensitivity of inflation as the economy strengthens implies that the shape of the Phillips curve is concave.

In the capacity constraints model, on the other hand, increased sensitivity of inflation to the economy's strength is in accordance with the convex.