Optimal Monetary Policy Rules Under Inflation Range Targeting

Juan Medina and Rodrigo Valdés

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: We calculate and compare optimal monetary policy (MP) rules for a simple economy under alternative central bank objective (loss) functions. We compare both soft- and hard-edges range (zone) targeting as well as asymmetric loss-functions to a quadratic loss case. The latter represents the standard loss-function for point inflation targeting. The results show that MP aggressiveness under range targeting critically depends on how hard are the edges of this range. If a range is thought of as a thick point objective, MP is always active (there are no inaction zones), although it is less aggressive against inflation and output shocks if range edges are sufficiently soft (vis-à-vis a point target). Harder edges makes MP more aggressive even when the economy is close to the central part of the range. Finally, an asymmetric loss-function for inflation that penalizes positive deviations relatively more generates a bias against output.

Date: 2000-01
New Economics Papers: this item is included in nep-cba and nep-pke
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Citations: View citations in EconPapers (11)

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Related works:
Chapter: Optimal Monetary Policy Rules under Inflation Range Targeting (2002)
Working Paper: Optimal Monetary Policy Rules Under Inflation Range Targeting (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:61

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