Central bank and asymmetric preferences: An application of sieve estimators to the U.S. and Brazil

Abstract

SummaryWhether central banks place the same weights on positive and negative deviations of inflation and of the output gap from their respective targets is an interesting question regarding monetary policy. The literature has been trying respond to this question using a specific asymmetric function, the linex. However, been asymmetric, is the linex the real specification?Trying answering this question, we applied a fully nonparametric estimation, the sieve estimator method, were the result could be any make sense function. This way, our results could corroborate with the quadratic or linex loss functions that have been used in the literature, or suggest an entirely new function. We applied the sieve estimator method for the United States and Brazil, a developed and an important emergent country which has consistently followed an inflation target system. The economy was modeled with forward-looking agents and central bank commitment. Our results indicate that the FED was more concerned with inflation rates below its target, but no asymmetry was found regarding inflation in the Volcker-Greenspan period neither regarding output gaps. As to Brazil, we found asymmetries regarding output gaps 2004 onwards, where the Brazilian Central Bank was more concerned with positive output gaps. Regarding inflation, we did not find any statistically significant asymmetries.