Nonlinear Monetary Policy Reaction with Asymmetric Central Bank Preferences: Some Evidence for Korea

Sokwon Kim and Byeongseon Seo

Hitotsubashi Journal of Economics, 2008, vol. 49, issue 2, 91-108

Abstract: The paper considers asymmetric central bank preferences and nonlinear AS curve in the monetary policy reaction function to examine nonlinear property of monetary policy rules. The optimal monetary policy rules are derived in a new Keynesian macroeconomic framework where the central bank has the asymmetric objective function. The derived reaction function explains the nonlinearr eaction to the inflation gap and the output gap. The nonlinearr eaction function is applied to explain the determination of the interest rate in Korea for the sample peroid of inflation targeting September 1998 to December 2005. The empirical evidence supports that the objective of the central bank is asymmetric in inflation management. The evidence of asymmetric reaction to the output gap is relatively weak. The empirical analysis reveals that the central bank responds strongly to the positive inflation gap compared to the negative inflation gap.

Keywords: Asymmetric Preferences; Inflation Targeting; Monetary Policy; Nonlinear Reaction (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:hit:hitjec:v:49:y:2008:i:2:p:91-108

DOI: 10.15057/16518

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