Asymmetric Preferences for Interest Rate Variability and Non-Linear Monetary Policy Inertia

Abstract

Introducing in a central bank loss function asymmetric preferences for interest rate stabilization together with a (symmetric) smoothing goal could lead to asymmetric interest rate smoothing. An empirical analysis supports this theoretical result and finds for the disinflation (Volcker) period a more cautious adjustment of interest rates downwards than upwards, and for the ‘price stability’ (Greenspan) period a more inertial behaviour in the opposite direction.