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Are central bank preferences asymmetric when policy targets vary over time?

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  • C. Patrick Scott

    (Missouri State University)

Abstract

The purpose of this paper is to analyze the effect of time varying monetary policy targets on the asymmetric preferences hypothesis for US monetary policy. Recent literature suggests that monetary policy responds asymmetrically to fluctuations in either an output gap or unemployment gap. Most of these studies impose the assumption of constant inflation and interest rate targets. This paper models both of these target rates as time varying parameters using a nested specification to test for constancy in the target rates. Additionally, the paper examines the estimation strategy needed to estimate all of the policy maker’s structural or deep parameters for the asymmetric preferences model. The model is estimated via maximum likelihood using an iterative Kalman filter. Results show that asymmetric policy response over the output gap disappears for all sample periods when the joint underlying dynamics of inflation and interest rate data are accounted for. Additionally, the results indicate that policy target rates are not well represented by constants for all sample periods examined. As a whole, the empirical exercise suggests that conclusions about monetary policy behavior might be sensitive to modeling assumptions about target policy rates.

Suggested Citation

  • C. Patrick Scott, 2016. "Are central bank preferences asymmetric when policy targets vary over time?," Empirical Economics, Springer, vol. 51(2), pages 577-589, September.
    • Handle: RePEc:spr:empeco:v:51:y:2016:i:2:d:10.1007_s00181-015-1021-0
    DOI: 10.1007/s00181-015-1021-0
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    References listed on IDEAS

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    1. Peter N. Ireland, 2007. "Changes in the Federal Reserve's Inflation Target: Causes and Consequences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1851-1882, December.
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    Cited by:

    1. Scott C. Patrick, 2020. "How Much Better Is Commitment Policy Than Discretionary Policy? Evidence From Six Developed Economies," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(2), pages 1-28, June.
    2. Scott, C. Patrick & Barari, Mahua, 2017. "Monetary policy deviations: A Bayesian state-space analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 1-12.
    3. Scott, C. Patrick, 2016. "Asymmetric preferences and monetary policy deviations," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 325-334.

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    More about this item

    Keywords

    Optimal monetary policy; Asymmetric preferences; Kalman filter; Time varying parameter;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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