Nonlinearities in Central Bank of Brazil's reaction function: the case of asymmetric preferences

This paper investigates the existence of possible asymmetries in the Central Bank of Brazil's objectives. By assuming that the loss function is asymmetric with regard to positive and negative deviations of the output gap and of the inflation rate from its target, we estimated a nonlinear reaction function which allows identifying and checking the statistical significance of asymmetric parameters in the monetary authority's preferences. For years 2000 to 2007, results indicate that the Central Bank of Brazil showed asymmetric preference over an above-target inflation rate. Given that this behavior may stem from policy decisions in periods of severe crises (e.g., in 2001 and in 2002), we restricted our sample to the 2004-2007 period. We did not find any empirical evidence of any type of asymmetry in the preferences over the stabilization of inflation and of the output gap for this period.Este trabalho investiga a existência de possíveis assimetrias nos objetivos do Banco Central. Assumindo que a função perda é assimétrica em relação a desvios positivos e negativos do gap do produto e da taxa de inflação em relação à meta, nós estimamos uma função de reação não linear que permite identificar e testar a significância estatística dos parâmetros de assimetrias nas preferências da autoridade monetária. Para o período de 2000-2007, os resultados indicaram que o Banco Central brasileiro apresentou uma preferência assimétrica a favor de uma inflação acima da meta. Visto que este comportamento pode ser decorrente das decisões de política em momentos de fortes crises (tais como as de 2001 e 2002), nós delimitamos a nossa amostra para o período de 2004-2007. Para este período, nós não encontramos evidências empíricas apontando para qualquer tipo de assimetria nas preferências sobre a estabilização da inflação e do gap do produto

Barro-Gordon Revisited: Reputational Equilibria in a New Keynesian Model

The aim of this paper is to solve the inconsistency problem à la Barro and Gordon within a New Keynesian model and to derive time-consistent (stable) interest rate rules of Taylor-type. We find a multiplicity of stable rules. In contrast to the Kydland/Prescott-Barro/Gordon approach, implementing a monetary rule where the cost and benefit resulting from inconsistent policy coincide - which implies a net gain of inconsistent policy behavior equal to zero - is not optimal. Instead, the solution can be improved by moving into the time-consistent area where the net gain of inconsistent policy is negative. We moreover show that under a standard calibration, the standard Taylor rule is stable in the case of a cost-push shock as well as under simultaneous supply and demand shocks

The Political Economy of European Monetary Union

Issues of European monetary union and international commercial policy share the centre stage of very current deliberations. This paper addresses the broader political economy perspective of monetary union rather than the specifics of this or that proposal, so as to abstract from the somewhat fluid nature of the discussions. I consider in turn, the background to the quest for monetary union, the conventional economic wisdom of such issues and finally, and more speculatively, the political economy aspects of European monetary arrangements in the world economy.

Optimal discretionary monetary policy in a model of asymmetric central bank preferences.

This paper considers optimal monetary policy in the context of the central bank adopting an asymmetric objective function. Our results show that under asymmetric preferences, many of the extant results on the time consistency problem need no longer hold