Asymmetric central bank's preference and inflation rate in Jordan

Abstract

PurposeThe purpose of this paper is to examine the hypothesis that a central bank's asymmetric preferences are able to explain inflation rate in a developing country. In addition, it seeks to help comprehend movements of inflation rate in Jordan and to understand Central Bank of Jordan preferences regarding inflation rate and output.Design/methodology/approachA standard monetary model consists of a central bank's loss function and an economy structure is constructed, which acts as a constraint on the central bank's behavior. Then, a distribute‐lag version of the derived model is estimated using ordinary least squares method.FindingsThe empirical evidence from the Jordanian economy shows that inflation rate relies on the variances of inflation rate and the variances of output. This finding supports the hypothesis that a central bank's asymmetric loss function is able to justify inflation rate movements. Moreover, the Jordanian central banker prefers higher inflation rate and higher level of output.Originality/valueThe paper provides evidence from a developing country regarding the ability of the asymmetric central bank preferences to justify inflation rate movement. In addition, the paper links central banks' losses with the uncertainty level and inflation rate in the economy.