The Taming of the Skew: Asymmetric Inflation Risk and Monetary Policy

Andrea De Polis, Leonardo Melosi and Ivan Petrella
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Andrea De Polis: University of Strathclyde & ESCOE

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: We document that inflation risk in the U.S. varies significantly over time and is often asymmetric. To analyze the first-order macroeconomic effects of these asymmetric risks within a tractable framework, we construct the beliefs representation of a general equilibrium model with skewed distribution of markup shocks. Optimal policy requires shifting agents’ expectations counter to the direction of inflation risks. We perform counterfactual analyses using a quantitative general equilibrium model to evaluate the implications of incorporating real-time estimates of the balance of inflation risks into monetary policy communications and decisions.

Keywords: Asymmetric risks; optimal monetary policy; balance of inflation risks; risk-adjusted inflation targeting; flexible average inflation targeting JEL Codes: E52; E31; C53 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-cba, nep-mon and nep-rmg
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https://warwick.ac.uk/fac/soc/economics/research/w ... erp_1530-_melosi.pdf

Related works:
Working Paper: The taming of the skew: asymmetric inflation risk and monetary policy (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1530

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