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 6: Inferring the Inflation Target
- baseline measures of inflation and output gap -

1960:1 -1979:2

1982:4 2003:2

c1

0.82**
(0.06)

2.60**
(0.72)

c2

0.84**
(0.19)

0.97*

(0.48)

c3

0.00
-

0.00
-

c4

-0.13**
(0.04)

-0.07

(0.09)

ρ

0.68**
(0.06)

0.89**

(0.04)

i*

5.4
-

6.0
-

π*

3.61**
(0.31)

2.77**

(0.25)

α

0.00
-

0.00
-

γ

-0.32**
(0.03)

-0.14

(0.21)

J(16) p-value

___________.897_______________

______________.793_______________

Specification: it = (1 - ρ)[(i* - c 1π * )+ c 1π t + c2yt + c4yt2 ]+ ρit-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, output gap, squared output gap, the fed funds rate and the rate of
change in the gdp deflator. The asymmetric preference parameter on inflation is
restricted to zero while the one on the output gap is computed as γ=2c√c2. The standard
errors are obtained using the delta method. 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.

27



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