A Feasible and Objective Concept of Optimal Monetary Policy: The Quadratic Loss Function in the Postwar Period

Pedro Duarte

History of Political Economy, 2009, vol. 41, issue 1, 1-55

Abstract: Monetary economists argue that they adopted quadratic loss functions because the latter delivered easy solutions to complex stochastic models. In that narrative, Simon (1956) and Theil (1957) are mentioned by their proofs that models with quadratic objective functions have the certainty equivalence property, which made their solutions feasible for the computers available at that time. Appearing in that narrative are Poole (1970) and Sargent and Wallace (1975), who were among the first to apply the tool to monetary economics. In this article I argue that in addition to offering “solutions feasibility,†the use of a quadratic loss function to characterize the behavior of central banks also inaugurated an objective way of talking about optimality. In this respect, the tool stabilized the discourse on optimal monetary policy.

Keywords: quadratic; loss; function (search for similar items in EconPapers)
Date: 2009
References: Add references at CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://hope.dukejournals.org/content/41/1/1.full.pdf+html link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hop:hopeec:v:41:y:2009:i:1:p:1-55

Access Statistics for this article

History of Political Economy is currently edited by Kevin D. Hoover

More articles in History of Political Economy from Duke University Press Duke University Press 905 W. Main Street, Suite 18B Durham, NC 27701.
Bibliographic data for series maintained by Center for the History of Political Economy Webmaster ().