Monetary Policy with a Convex Phillips Curve and Asymmetric Loss

Demosthenes Tambakis ()

No 1998/021, IMF Working Papers from International Monetary Fund

Abstract: Recent theoretical and empirical work has cast doubt on the hypotheses of a linear Phillips curve and a symmetric quadratic loss function underlying traditional thinking on monetary policy. This paper analyzes the Barro-Gordon optimal monetary policy problem under alternative loss functions—including an asymmetric loss function corresponding to the “opportunistic approach” to disinflation—when the Phillips curve is convex. Numerical simulations are used to compare the implications of the alternative loss functions for equilibrium levels of inflation and unemployment. For parameter estimates relevant to the United States, the symmetric loss function dominates the asymmetric alternative.

Keywords: WP; Phillips curve; monetary policy; Asymmetric loss functions; loss function; inflation bias; shock distribution; shock realization; inaction range; aversion parameter; inflation shock; inflation increase; inflation aversion coefficient; Inflation; Unemployment rate; Unemployment; Inflation targeting; Monetary tightening (search for similar items in EconPapers)
Pages: 28
Date: 1998-02-01
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1998/021

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