Do Central Banks have Precautionary Demands for Expansions and for Price Stability?

Alex Cukierman () and Vito Antonio Muscatelli ()

Working Papers from Department of Economics, University of Glasgow

Abstract: This paper analyses the impact of asymmetric preferences with respect to inflation and output by policymakers on interest-rate reaction functions. A theoretical framework which makes it possible to identify the dominant type of asymmetry is developed and related to the precautionary demand of pol- icymakers for expansions and for low inßation. Using data for some G7 economies, the paper shows that, except for Germany, nonlinear and asym- metric behaviour is present. A main Þnding is that where credibility-building and disinflation has already been achieved, the monetary authorities develop a greater precautionary demand for output expansions than for low inflation. This may generate a new type of inflation bias. Conversely, where credibility- building is still a concern for the authorities, managing the business cycle is dominated by concerns of the monetary authorities to keep inflation expec- tations low.

JEL-codes: E58 E61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mon
Date: 2001-07, Revised 2002-03
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Persistent link: http://EconPapers.repec.org/RePEc:gla:glaewp:2002_4

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