Inflation Targeting and Nonlinear Policy Rules: The Case of Asymmetric Preferences (new title: The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences)

Table 1: Reduced-form Estimates

- baseline measures of inflation and output gap -

Specification: i_t = (1 - ρ)[i* +c₁ (π_t - π ) + c2y_t + c3 (π_t - π )2 + c4y_t² ] + ρ_t-1 + ν_t

Notes: Standard errors using a four lag Newey-West covariance matrix are reported in
brackets. Inflation is measured as the change in the personal consumption deflator and
the output gap is obtained using the CBO potential output. The instrument set includes
four lags of inflation, squared inflation, output gap, squared output gap, the fed funds rate
and the rate of change in the gdp deflator. The asymmetric preference parameters are
computed as α=2c₃∕c₁ and γ=2c₄∕c₂ while the standard errors are obtained using the delta
method. W(n) refers to the Wald statistics of the test for n parameter restrictions, which is
distributed as a χ²(n) under the joint null hypothesis c3=c4=0. The latter is equivalent to
the original null of symmetric central bank preferences, α=γ=0. J(m) refers to the
statistics of Hansen’s test for m overidentifying restrictions which is distributed as a
χ²(m) under the null hypothesis of valid overidentifying restrictions. The superscript **
and * denote the rejection of the null hypothesis that the true coefficient is zero at the 1
percent and 5 percent significance levels, respectively.

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