Doyle, Matthew; Falk, Barry L.

WP #06005, February 2006

Recent theoretical work shows that changes in the volatility of inflation and/or unemployment affect equilibrium inflation outcomes when the central banker's loss function is asymmetric. We show that previous evidence offered in support of the proposition that the volatility of unemployment helps explain inflation outcomes suffers from a spurious regression problem. Once this problem is controlled for, the evidence suggests that the volatility of unemployment does not help explain inflation outcomes. There is some evidence of a relationship between inflation and its volatility, but the data is not strongly supportive of the view that asymmetric central bank preferences are an important driver of inflation.

JEL Classification: E50, E61

Keywords: inflation, monetary policy, asymmetric loss

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