The taming of the skew: asymmetric inflation risk and monetary policy

Ivan Petrella, Andrea De Polis and Leonardo Melosi

No 3028, Working Paper Series from European Central Bank

Abstract: We document that inflation risk in the U.S. varies significantly over time and is often asymmetric. To analyze the macroeconomic effects of these asymmetric risks within a tractable framework, we construct the beliefs representation of a general equilibrium model with skewed distribution of markup shocks. Optimal policy requires shifting agents’ expectations counter to the direction of inflation risks. We perform counterfactual analyses using a quantitative general equilibrium model to evaluate the implications of incorporating real-time estimates of the balance of inflation risks into monetary policy communications and decisions. JEL Classification: E52, E31, C53

Keywords: asymmetric risks; balance of inflation risks; flexible average inflation targetin; optimal monetary policy; risk-adjusted inflation targeting (search for similar items in EconPapers)
Date: 2025-02
New Economics Papers: this item is included in nep-mon and nep-rmg
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Related works:
Working Paper: The Taming of the Skew: Asymmetric Inflation Risk and Monetary Policy (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253028

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