Expected Social Welfare under a Convex Philips Curve and Asymmetric Policy Preferences

Demosthenes N. Tambakis ()

Journal of Money, Credit and Banking, 2002, vol. 34, issue 2, pages 434-49

Abstract: 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. For parameter estimates relevant to the U.S., numerical simulations show that the symmetric loss function dominates the asymmetric alternative in expected social welfare terms. Asymmetric policy preferences enhance social welfare only under extreme parameter values. This result is robust to sensitivity analysis with respect to inflation variability and the degrees of Phillips curve convexity and preference asymmetry, thereby supporting arguments for a tough anti-inflationary stance by the Federal Reserve regardless of the "true" social loss function.

Date: 2002

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Persistent link: http://EconPapers.repec.org/RePEc:mcb:jmoncb:v:34:y:2002:i:2:p:434-49

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