Symmetric versus asymmetric central bank preferences

This book presents an analysis of two distinct theoretical approaches from the vast literature on modeling central bank preferences. The first advocates the use of symmetric quadratic loss functions. This approach stands out for the ease of analytical resolution it introduces into models considered complex, but it can be criticized for neglecting uncertainty by supporting the principle of certainty equivalent and for reflecting the symmetry of central bank preferences towards deviations of target variables from their targets. In this regard, a second, more realistic approach, which emerged in the late 1990s, allows this criticism to be overcome. The latter assumes the asymmetry of the central bank's preferences and allows uncertainty to be taken into account. As a result, the principle of certainty equivalent proves inappropriate and the central banker must adopt a cautious approach to uncertainty in accordance with Brainard's (1967) principle of prudence, which allows uncertainty to affect real and nominal economic variables.