Monetary Policy with a Convex Phillips Curve and Asymmetric Loss

February 1, 1998

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Demosthenes N. Tambakis Monetary Policy with a Convex Phillips Curve and Asymmetric Loss, (USA: International Monetary Fund, 1998) accessed December 27, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Inflation, Inflation targeting, Labor, Monetary policy, Monetary tightening, Prices, Unemployment, Unemployment rate

Keywords: Asymmetric loss functions, Aversion parameter, Inaction range, Inflation, Inflation aversion coefficient, Inflation bias, Inflation increase, Inflation shock, Inflation targeting, Loss function, Monetary policy, Monetary tightening, Phillips curve, Shock distribution, Shock realization, Unemployment, Unemployment rate, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1998/021
Stock No:

WPIEA0211998
ISBN:

9781451921717
ISSN:

1018-5941

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