Are monetary-policy reaction functions asymmetric?: The role of nonlinearity in the Phillips curve

Abstract

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 in ation or output are above target than the amount it will reduce them when they are below target. Speciÿcally, the main prediction of our model is that such a source of nonlinearity leads to the inclusion of the interaction between expected in ation and the output gap in an otherwise linear Taylor rule. We ÿnd empirical support for this type of asymmetries in the interest rate-setting behaviour of four European central banks but none for the US Fed.

Exchange Rate Pass-Through in Russia

“…Asymmetric price rigidity may be another reason for incomplete and variable ERPT (Dolado et al, 2005): goods` prices demonstrate different responses to changes in their manufacturing costs, being less responsive to reduction and more responsive to rise in manufacturing costs. Therefore, changes in the exchange rate which drive up or down the value of intermediate goods will lead to changes in manufacturing costs of final goods, thereby influencing in different ways the dynamics of final prices, i.e.…”

Testing for asymmetries in the preferences of the euro-area monetary policymaker

“…In view of the definition of price stability by the ECB, reviewed above, a value of 2 percent for * is a consensual choice; this target has also been used, in the related literature, by Dolado et al (2005) and by Surico (2003). Figure 1 shows, for the sample period, the data on the relevant arguments in the policymaker's loss function, together with the corresponding desired values, which are the threshold levels in the asymmetry tests -0 for y and i, and 2 for .…”

Testing for Asymmetries in the Preferences of the Euro-Area Monetary Policymaker

“…Versions of this type of macroeconomic structure have been profusely used in recent studies of monetary policy, including, for European countries, Taylor (1999) and Dolado et al (2005). According to Rudebusch and Svensson (2002, pp.…”

“…7 The framework for testing loss function asymmetry requires a pre-defined inflation target, *. In view of the definition of price stability by the ECB, reviewed above, a value of 2 percent for * is a consensual choice; this target has also been used, in the related literature, by Dolado et al (2005) and by Surico (2003). Figure 1 shows, for the sample period, the data on the relevant arguments in the policymaker's loss function, together with the corresponding desired values, which are the threshold levels in the asymmetry tests -0 for y and i, and 2 for .…”