 Optimal Monetary Policy Rules Under Inflation Range TargetingJuan Medina and Rodrigo Valdés Working Papers from Cambridge - Risk, Information & Quantity Signals 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. Keywords: MONETARY; POLICY (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:fth:cambri:61 Access Statistics for this paper More papers in Working Papers from Cambridge - Risk, Information & Quantity Signals UNIVERSITY OF CAMBRIDGE, RESEARCH PROJECT ON RISK, INFORMATION AND QUANTITY SIGNALS IN ECONOMICS(E.S.R.C.), DEPARTMENT OF APPLIED ECONOMICS, SIDGWICK AV. CAMBRIDGE CB3 9DEDE U.K... Contact information at EDIRC. |
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