A Prudent Central Banker

Francisco Ruge-Murcia

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: This paper studies monetary policy in an economy where the central banker's preferences are asymmetric around optimal inflation. In particular, positive deviations from the optimum can be weighted more, or less, severely than negative deviations in the policy maker's loss function. It is shown that under asymmetric preferences, uncertainty can induce a prudent behavior on the part of the central banker. Since the prudence motive can be large enough to override the inflation bias, optimal monetary policy could be implemented even in the absence of rules, reputation, or contractual mechanisms. For certain parameter values, a deflationary bias can arise in equilibrium.

JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2001
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Citations: View citations in EconPapers (11)

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http://hdl.handle.net/1866/348 (application/pdf)

Related works:
Journal Article: A Prudent Central Banker (2002)
Working Paper: A Prudent Central Banker (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:2001-07

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