Nonlinear Monetary Policy Rules: Some New Evidence for the U.S.

Abstract

This paper dreives optimal monetary policy rules in setups where certainty equivalence does not hold because either central bank preferences are not quadratic, and/or the aggregate supply relation is nonlinear. Analytical results show that these features lead to sign and size aymmetries, and nonlinearities in the policy rule. Reduced-form estimates indicate that US monetary policy can be characterized by a nonlinear policy rule after 1983, but not before 1979.This finding is consistent with the view that the Fed`s inflation preferences during the VolckerGreenspan regime differ considerably from the ones during the Burns-Miller regime.

Dissent in monetary policy decisions

“…In the Bank of England there were 50 dissents in this situation: 29 in favor of keeping the interest rate unchanged and 21 in favor of a policy in the same direction as that adopted by the committee but of a usually larger magnitude. 8 In the Riksbank, there were 17 dissents in meetings where the EB agreed to adjust the interest rate: 11 were in favor of keeping the Repo rate unchanged and 6 in favor of a change in the same direction as that chosen by the committee (in two cases of a smaller magnitude and in four cases of a larger magnitude).…”

“…However, in the case of the FOMC, the highest average number of dissenting votes takes place when the committee lowers the interest rate. 8 For example, in the MPC meeting on 5 April 2001, the committee agreed to cut the interest rate by 25 basis points but two members dissented in favor of a larger cut of 50 points. [5] has been changed but the dissenter would prefer an even larger change.…”

“…Proof: First note from (7), (4) and (5) that for each committee member the induced preferences over the interest rate are single-peaked, with a peak given by (8). Next, we de ne the undominated set U of the supermajority relation in set I as the set of alternatives that are not defeated in a direct vote against any alternative in I.…”

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

“…Examples of this structural approach are much more scarce, however, and seem limited to Dolado et al (2004) and Surico (2003Surico ( , 2004. Dolado et al (2004) have shown that an asymmetric loss function of the linex functional form and a macroeconomic structure of the Rudebusch-Svensson type Svensson, 1999, 2002) generate an optimal policy reaction function that includes the conditional variance of inflation in addition to the standard reaction function regressors.…”

Optimal monetary policy reaction function in a model with target zones and asymmetric preferences for South Africa

“…Cukierman and Gerlach (2003), Ruge-Murcia (2003), Dolado et al (2004Dolado et al ( , 2005, and Surico (2007a,b) have shown evidence supporting asymmetries by adopting a monetary policy reaction function that feature asymmetries in either inflation or the output gap for the US, UK, EU and OECD countries. Boinet and Martin (2008) also implemented a monetary policy reaction function that feature asymmetries and zone-like behaviours for the UK and found the evidence of zone-like responses to inflation.…”