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Optimal Monetary Policy with Asymmetric Preferences for Output

Steven Cassou (), Patrick Scott and Jesús Vázquez

No 2012-16, DFAEII Working Papers from University of the Basque Country - Department of Foundations of Economic Analysis II

Abstract: Using a model of an optimizing monetary authority which has preferences that weigh inflation and unemployment, Ruge-Murcia (2003, 2004) finds empirical evidence that the authority has asymmetric preferences for unemployment. We extend this model to weigh inflation and output and show that the empirical evidence using these series also supports an asymmetric preference hypothesis, only in our case, preferences are asymmetric for output. We also find evidence that the monetary authority targets potential output rather than some higher output level as would be the case in an extended Barro and Gordon (1983) model.

Keywords: optimal monetary policy; assymmetric preferences; conditional output volatility (search for similar items in EconPapers)
JEL-codes: E31 E52 E61 (search for similar items in EconPapers)
Date: 2012-11-15
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Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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