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Limited information and the relation between the variance of inflation and the variance of output in a new keynesian perspective

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  • Alejandro Rodríguez Arana

    (Department of Economics, Universidad Iberoamericana, Mexico City. Mexico)

Abstract

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.

Suggested Citation

  • Alejandro Rodríguez Arana, 2015. "Limited information and the relation between the variance of inflation and the variance of output in a new keynesian perspective," Working Papers 0115, Universidad Iberoamericana, Department of Economics.
    • Handle: RePEc:uic:wpaper:0115
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    References listed on IDEAS

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