Limited information and the relation between the variance of inflation and the variance of output in a new keynesian perspective
Alejandro Rodríguez Arana ()
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Alejandro Rodríguez Arana: Department of Economics, Universidad Iberoamericana, Mexico City. Mexico
Working Papers from Universidad Iberoamericana, Department of Economics
When the central bank minimizes a quadratic loss function depending upon the inflation gap and the output gap, a negative association between the variance of inflation and the variance of output emerges. The variance of output will be higher the greater is the preference of the central bank for stabilizing inflation. Instead, when the central bank sets the interest rate according with the minimization problem, but on ahead of the beginning of the correspondent period, the tradeoff between the variance of inflation and the variance of output disappears completely.
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