A Prudent Central Banker

Cahier 2001-07

RUGE-MURCIA, Francisco J.

Département de sciences économiques

Université de Montréal

Faculté des arts et des sciences C.P. 6128, succursale Centre-Ville Montréal (Québec) H3C 3J7 Canada http://www.sceco.umontreal.ca SCECO-information@UMontreal.CA Téléphone : (514) 343-6539 Télécopieur : (514) 343-7221

Ce cahier a également été publié par le Centre interuniversitaire de recherche en économie quantitative (CIREQ) sous le numéro 07-2001.

This working paper was also published by the Center for Interuniversity Research in Quantitative Economics (CIREQ), under number 07-2001.

CAHIER 2001-07

A PRUDENT CENTRAL BANKER

Francisco J. RUGE-MURCIA1

1

Centre de recherche et développement en économique (C.R.D.E) and Département de sciences économiques, Université de Montréal

March 2001

___________________

The author is indebted to Paul Evans, David Peel, and an anonymous referee for helpful suggestions and comments. An earlier version of this paper was circulated under the title "Deflation and Optimal Monetary Policy.'' Financial support from the Social Sciences and Humanities Research Council and the Fonds pour la Formation de Chercheurs et l'Aide à la Recherche is gratefully acknowledged.

RÉSUMÉ

Ce mémoire étudie la politique monétaire dans une économie où les préférences de la Banque centrale sont asymétriques autour de l'inflation optimale. Plus précisément, les déviations positives de l'optimum peuvent avoir une plus grande ou une plus faible pondération dans la fonction de perte que les déviations négatives en ce qui concerne les preneurs de décisions des politiques. Sous des préférences asymétriques, il a été démontré que l'incertitude pouvait entraîner un comportement prudent de la part de la Banque centrale. Ainsi, les motifs de prudence peuvent être assez grands pour annuler le biais d'inflation, une politique monétaire optimale peut être réalisée même en l'absence de règles, de réputation ou de mécanismes contractuels. Pour certaines valeurs de paramètres, un biais de déflation peut survenir en équilibre.

Mots clés : délégation, préférences asymétriques, prudence, déflation

ABSTRACT

This paper studies monetary policy in an economy where the central banker's preferences are asymmetric around optimal inflation. In particular, positive deviations from the optimum can be weighted more, or less, severely than negative deviations in the policy maker's loss function. It is shown that under asymmetric preferences, uncertainty can induce a prudent behavior on the part of the central banker. Since the prudence motive can be large enough to override the inflation bias, optimal monetary policy could be implemented even in the absence of rules, reputation, or contractual mechanisms. For certain parameter values, a deflationary bias can arise in equilibrium.

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