FEEM working papers "Note di lavoro" series
2002 .002

What Does Monetary Policy Reveal about Central Bank's Preferences?


Authors: Paolo Surico, Efrem Castelnuovo
Series: Economy and Society
Type: Journal
Keywords: Central bank's preferences,calibration,inflation targeting,optimal monetary policy
JEL n.: C61,E52,E58
JEL: Economic Notes
Pages: 32 (3), 335-359

Abstract

The design of monetary policy depends upon the targeting strategy adopted by the central bank. This strategy describes a set of policy preferences, which are actually the structural parameters to analyse monetary policy making. Accordingly, we develop a novel calibration method to identify central bank's preferences from the estimates of an optimal Taylor-type rule. The empirical analysis on US data shows that output stabilization has not been an independent argument in the Fed's objective function during the Greenspan era. This suggests that the output gap has entered the policy rule only as leading indicator for future inflation, therefore being only instrumental (to stabilize inflation) rather than important per se.

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