DP3405 Non-Linear Monetary Policy Rules: Some New Evidence for the US

Author(s): Juan J. Dolado, Ramón María-Dolores, Francisco J. Ruge-Murcia
Publication Date: June 2002
Keyword(s): asymmetric preferences, inflation targets, monetary policy, non-linear Phillips curve, non-linear Taylor rules
JEL(s): E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3405

This Paper derives optimal monetary policy rules in setups where certainty equivalence does not hold because either central bank preferences are not quadratic, and/or the aggregate supply relation is non-linear. Analytical results show that these features lead to sign and size asymmetries, and non-linearities in the policy rule. Reduced-form estimates indicate that US monetary policy can be characterized by a non-linear policy rule after 1983, but not before 1979. This finding is consistent with the view that the Fed?s inflation preferences during the Volcker-Greenspan regime differ considerably from the ones during the Burns-Miller regime.