Asymmetric Preferences for Output
The paper titled “Optimal Monetary Policy with Asymmetric Preferences for Output” is published in Economics Letters (August 2012, Vol. 117, pp. 654-656). This paper extends the work of Ruge-Murcia (2003) by recasting that model to examine asymmetric monetary policy preferences toward output. The asymmetric loss function that faces the policy maker is one where positive and negative deviations of output from the natural rate are not met with an equal sense of urgency, an assumption that is made in much of the optimal monetary policy literature. A linearized, reduced form decision rule for inflation is estimated using maximum likelihood. Results indicate a rejection of symmetric preferences for output gap movements. Additionally, evidence indicates that the Federal Reserve targets potential output rather than some higher output level as would be the case in a similarly extended Barro and Gordon (1983) type model.
Time Varying Monetary Policy
The paper titled “Using Time Varying Monetary Policy Parameters to Identify Asymmetric Preferences” is my job market paper. One common drawback of the empirical optimal monetary policy literature is that inflation and interest rate targets are often assumed to be constant within the model. In many cases, they are nuisance parameters that are often unidentified. This paper relaxes this restriction and models these targets as time varying processes within Surico (2007)'s optimal policy model. This extension as well as employing a systems equation estimation approach allows for identification of all of the policy planner's deep parameters. Empirical evidence suggests a rejection that inflation and interest targets are constant over time. Additionally, the evidence suggests that inflationary gaps and output gaps are asymmetrically weighted by the Fed in the full sample estimates. These findings are robust to the possibility that monetary policy behavior has shifted over time in an extended model. The asymmetry disappears in the post-Volcker subsample estimation, consistent with Surico (2007).
Does the Fed Follow Speed Limits?
Walsh (2003) suggests preferences for the monetary authority where rapid speed of adjustment from monetary policy generates loss for the policy maker. This type of loss function builds persistence into the optimality problem where traditionally there is none. Walsh also explores a more dynamically rich problem where lagged dependent variables are incorporated into the structural model equations. Tangentially related to this, Harvey (2011) argues that the inclusion of lagged values of inflation in the New-Keynesian Phillips curve is econometrically problematic. He proposes using an unobserved trend and stochastic cycle in order to better capture the persistence in the data that the model does not account for. The paper titled “Does the Fed Follow Speed Limits? Evidence Using Unobserved Components Modeling” synthesizes these two contributions. A general form “speed limit” loss function is estimated that relaxes the imposed symmetry assumption that Walsh models and incorporates the unobserved components al a Harvey. Results indicate the speed of output gap adjustments is not significant to monetary policy for the Fed. On the other hand, inflation adjustments are significant.