Policy Preferences for Output Stability before and after Inflation Targeting

Eurilton Araújo and Tatiana Pinheiro

No 7, Business and Economics Working Papers from Unidade de Negocios e Economia, Insper

Abstract: This paper examines a set of inflation-targeting countries and presents evidence on the attitude of policymakers to positive and negative output gaps. In fact, central banks may dislike deviations from potential output of one sign more than deviations of the opposite sign. Instead of the usual quadratic specification, an asymmetric loss function describes these policy preferences. In this paper, we test for asymmetries concerning the output gap. Since the degree of symmetry may change with policy regimes, we consider, for each country, two sample periods: before and after the adoption of inflation targeting. Empirical results support a quadratic loss function for the majority of monetary policymakers, irrespective of the monetary policy regime.

Pages: 11 pages
Date: 2008
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