Asymmetric Central Bank Preferences in Small Open Economies with Inflation-targeting Regimes: Evidence from the UK

Monetary policy is crucial to economic stability, with central banks traditionally assumed to minimize a quadratic loss function subject to a linear economic structure. This framework suggests an optimal policy rule where the short-term interest rate responds linearly to inflation and output deviations. However, this linearity assumption has been challenged, with growing evidence supporting non-linear policy rules due to asymmetric preferences among policymakers (Nobay & Peel, 2003; Ruge-Murcia, 2003). Policymakers may weigh output contractions more heavily than expansions, driven by political or economic considerations (Persson & Tabellini, 1999; Cukierman & Gerlach, 2003).