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

Author

Listed:
  • De Polis, Andrea

    (University of Strathclyde & ESCOE)

  • Melosi, Leonardo

    (University of Warwick, European University Institute, DNB & CEPR)

  • Petrella, Ivan

    (Collegio Carlo Alberto, University of Turin & CEPR)

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.

Suggested Citation

  • De Polis, Andrea & Melosi, Leonardo & Petrella, Ivan, 2024. "The Taming of the Skew : Asymmetric Inflation Risk and Monetary Policy," The Warwick Economics Research Paper Series (TWERPS) 1530, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1530
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    References listed on IDEAS

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    Keywords

    Asymmetric risks ; optimal monetary policy ; balance of inflation risks ; risk-adjusted inflation targeting ; flexible average inflation targeting JEL Codes: E52 ; E31 ; C53;
    All these keywords.

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