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A Prudent Central Banker
Francisco J. Ruge-Murciá
IMF Staff Papers
Vol. 49, No. 3 (2002), pp. 456-469
Stable URL: http://www.jstor.org/stable/3872505
Page Count: 14
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This paper studies the role of prudence in modern central banking. To that end, it relaxes the usual assumption of quadratic preferences and adopts instead an asymmetric preference specification whereby positive deviations from a target can be weighted more, or less, severely than negative deviations. It is shown that prudence with respect to inflation (unemployment) reduces (increases) equilibrium inflation. The overall effect depends on the relative magnitude of the preference parameters and the conditional variances of inflation and unemployment. The implications of the model are examined using cross-section data from OECD countries.
IMF Staff Papers © 2002 International Monetary Fund