The Nonlinear Phillips Curve and Inflation Forecast Targeting: Symmetric Versus Asymmetric Monetary Policy Rules

Eric Schaling

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

We extend the Svensson (1997a) inflation forecast targeting framework with a convex Phillips curve.We derive an asymmetric target rule, that implies a higher level of nominal interest rates than the Svensson (1997a) forward looking version of the reaction function popularised by Taylor (1993).Extending the analysis with uncertainty about the output gap, we find that uncertainty induces a further upward bias in nominal interest rates.Thus, the implications of uncertainty for optimal policy are the opposite of standard multiplier uncertainty analysis.

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1993Discretion versus policy rules in practice 1999Monetary Policy Rules 1997Inflation forecast targeting: Implementing and monitoring inflation targets 1976The Valuation of Uncertain Income Streams and the Pricing of Options 1999Inflation targeting: lessons from the international experience 1995Optimal contracts for central bankers 1967Uncertainty and the effectiveness of policy 1997Reflections on the Natural Rate Hypothesis

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2014Monetary policy and heterogeneous inflation expectations in South Africa 2015A closer look at the Phillips curve using state-level data 1999Simple Monetary Policy Rules Under Model Uncertainty 2013Inflation and Inflation Expectations in S outh A frica: an Attempt at Explanation 1999Exact Utilities under Alternative Monetary Rules in a Simple Macro Model with Optimizing Agents 2001An Evaluation of Alternative Monetary Policy Rules in a Model with Capacity Constraints

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