Activity shortfalls are more costly than strong activity. I consider optimal monetary policy underdiscretion with an asymmetric (activity shortfalls) loss function. The model satisfies the naturalrate hypothesis. The asymmetric loss function and resulting optimal monetary policy exacerbatesshortfalls in activity. The additional frequency of activity shortfalls arises from the adjustment ofexpectations implied by the natural rate hypothesis. The shortfalls asymmetry leads to aninflationar
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