Testing for asymmetries in the preferences of the euro-area monetary policymaker

Alvaro Aguiar and Manuel Martins

Applied Economics, 2008, vol. 40, issue 13, 1651-1667

Abstract: This article tests for asymmetries in the preferences of the euro-area monetary policymaker with 1995:1-2005:2 data from the latest update of the European Central Bank's (ECB's) Area-wide database. Following the relevant literature, we distinguish between three types of asymmetry: precautionary demand for expansions, precautionary demand for price stability and interest rate smoothing asymmetry. Based on the joint generalized method of moments (GMM) estimation of the Euler equation of optimal policy and the aggregate supply-aggregate demand (AS-AD) structure of the macroeconomy, we find evidence of precautionary demand for price stability in the preferences revealed by the monetary policymaker. This type of asymmetry is consistent with the ECB's definition of price stability and with the priority of credibility-building by a recently created monetary authority.

Date: 2008
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Related works:
Working Paper: Testing for Asymmetries in the Preferences of the Euro-Area Monetary Policymaker (2005)
Working Paper: Testing for Asymmetries in the Preferences of the Euro-Area Monetary Policymaker (2005)
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DOI: 10.1080/00036840600870999

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