The Inflation Bias When the Central Bank Targets, the Natural Rate of Unemployment

Francisco Ruge-Murcia

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

Abstract: This paper studies the proposition that an inflation bias can arise in a setup where a central banker with asymmetric preferences targets the natural unemployment rate. Preferences are asymmetric in the sense that positive unemployment deviations from the natural rate are weighted more (or less) severely than negative deviations in the central banker's loss function. The bias is proportional to the conditional variance of unemployment. The time-series predictions of the model are evaluated using data from G7 countries. Econometric estimates support the prediction that the conditional variance of unemployment and the rate of inflation are positively related.

Keywords: inflation bias; asymmetric eferences (search for similar items in EconPapers)
JEL-codes: E30 E50 E58 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2001
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Citations: View citations in EconPapers (11)

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http://hdl.handle.net/1866/478 (application/pdf)

Related works:
Journal Article: The inflation bias when the central bank targets the natural rate of unemployment (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:2001-22

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