Central bank and asymmetric preferences: An application of sieve estimators to the U.S. and Brazil

a r t i c l e i n f o Whether central banks place the same weights on positive and negative deviations of inflation and of the output gap from their respective targets is an interesting question regarding monetary policy. The literature has sought to address this issue using a specific asymmetric function, the so-called Linex loss function. However, is the Linex an actually asymmetric specification? In an attempt to answer this question, we applied the sieve estimation method, a fully nonparametric approach, in which the result could be any proper loss function. This way, our results could corroborate the quadratic or Linex loss functions used in the literature or suggest an entirely new function. We applied the sieve estimation method to the United States and to Brazil, an emergent country which has consistently followed an inflation targeting regime. The economy was modeled with forward-looking agents and central bank commitment. Our results indicate that the FED was more concerned with inflation rates below the target, but no asymmetry was found in the inflation–output process in the Volcker–Greenspan period. As to Brazil, we found asymmetries in output gaps from 2004 onwards, when the Brazilian Central Bank was more concerned with positive output gaps; but we did not find any statistically significant asymmetries in inflation. The literature pays special attention to how central banks conduct the monetary policy. They act to control inflation and, owing to frictions in the economy, they also affect the real side in the short run. As monetary authorities have the power to affect the output temporarily, they likely include output and employment stability among their goals, in addition to price stabilization. Nonetheless, central banks do not always explicitly disclose their goals. Actually, their reaction to changes in economic variables – through the so-called reaction functions – is perceived more easily. In the seminal work by Taylor (1993), the monetary authority adjusts the nominal interest rate in response to deviations of inflation from its target and from the output gap. This monetary authority's reaction function can be construed as the result of a model that treats the central bank as an usual economic agent, seeking to minimize a loss that depends on deviations of the inflation and the output as the consumer seeks to maximize her utility. Moreover, as consumer's decisions are limited by her budget constrain, the actions of the central bank are constrained the structure …