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Testing for Asymmetries in the Preferences of the Euro-Area Monetary Policymaker

[journal article]

Aguiar, Alvaro; M. F. Martins, Manuel

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Abstract This paper tests for asymmetries in the preferences of the Euro-Area monetary policymaker with 1995:I-2005:II data from the latest update of the ECB's Area-wide database. Following the relevant literature, we distinguish between three types of asymmetry: precautionary demand for expansions, precautionary demand for price stability and interest rate smoothing asymmetry. Based on the joint GMM estimation of the Euler equation of optimal policy and the AS-AD structure of the macroeconomy, we find evidence of precautionary demand for price stability in the preferences revealed by the monetary policymaker. This type of asymmetry is consistent with the ECB’s definition of price stability and with the priority of credibility-building by a recently created monetary authority.
Document language English
Publication Year 2008
Page/Pages p. 1651-1667
Journal Applied Economics, 40 (2008) 13
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)