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


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.

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Fig. 1


  1. 1.

    Ruge-Murcia does estimate a multiple equation model, but the model lacks enough identifying restrictions for direct estimation of all structural parameters.

  2. 2.

    A full derivation of these equations can be provided by the author upon request or can be found by the sources listed above.

  3. 3.

    This statement implies that the limit is taken after FOC’s are taken. Otherwise the output gap would not enter into the policy maker’s reaction function at all.

  4. 4.

    Additionally, as we will see the unobserved inflation target is an element in the state equation which is only linearly and not quadratically identified in the dynamic linear model.

  5. 5.

    This is a feature of the baseline dynamic New-Keynesian model. Real money holdings enter the utility function for the consumer in a linear fashion. Thus, monetary policy does not influence the consumer’s FOCs for consumption, labor, or bonds.

  6. 6.

    Here the term “suboptimal” describes the level of output and inflation observed in the economy as a result of policy action, not in the mathematical sense of the word.

  7. 7.

    Details on model derivation, the formulation of the state-space model, and the estimation algorithm are available from the author upon request.

  8. 8.

    Additionally, Surico does not impose symmetry over the inflationary gap as is done for the reasons outlined in Sect. 2. It is possible that in small samples this could influence the estimates of \(\gamma \) for that time period.

  9. 9.

    This is calculated using the estimates from Column 2 of Table 1.


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The author wishes to thank two anonymous referees for their exceedingly helpful comments and suggestions.

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Correspondence to C. Patrick Scott.

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Scott, C.P. Are central bank preferences asymmetric when policy targets vary over time?. Empir Econ 51, 577–589 (2016).

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  • Optimal monetary policy
  • Asymmetric preferences
  • Kalman filter
  • Time varying parameter

JEL Classification

  • E31
  • E52
  • E58
  • E61