The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences

This paper investigates the empirical relevance of a new framework for monetary policy analysis in which the decision makers are allowed, but not required, to weight differently positive and negative deviations of inflation and output from the target values. The estimates of the central bank's Euler equation indicate that the preferences of the Fed had been asymmetric only before 1979, with the interest rate response to output contractions being larger than the response to output expansions of the same magnitude. We show that this asymmetry on output implied an average inflation bias around 1.5%. While the implicit inflation target also declined, the asymmetric preferences induced inflation bias appears to account for a sizable fraction of the historical decline in the inflation mean.