The Taming of the Skew: Asymmetric Inflation Risk and Monetary Policy

Andrea De Polis, Leonardo Melosi and Ivan Petrella
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Andrea De Polis: Banco de España
Leonardo Melosi: European University Institute and CEPR
Ivan Petrella: Collegio Carlo Alberto, University of Turin and CEPR

No 2626, Working Papers from Banco de España

Abstract: Time-varying asymmetric inflation risks generate persistent stagflationary effects. A quantitative general equilibrium model with time-varying skewness in the distribution of cost-push shocks matches these effects. Central to the analysis is a representation theorem that provides a tractable characterization of a broad class of models with asymmetric shock distributions. The theorem enables a closed-form characterization of optimal monetary policy, according to which the central bank should lean against the balance of inflation risks, while rendering quantitative general-equilibrium models with time-varying risks amenable to counterfactual and scenario analysis.

Keywords: Balance of risks; optimal monetary policy; asymmetric beliefs; policy trade-offs; risk-adjusted inflation targeting; geopolitical risks. (search for similar items in EconPapers)
JEL-codes: C53 E31 E52 (search for similar items in EconPapers)
Pages: 94 pages
Date: 2026-09
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2626

DOI: 10.53479/44247

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