Monetary Policy Loss Functions: Two Cheers for the Quadratic
P. Schellekens and
Jagjit Chadha ()
Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
The authors examine the implications for the optimal interest rate rule that follow from relaxing the assumption that the policy-maker's loss function is quadratic. They investigate deviations from quadratics for both symmetric and asymmetric preferences for a single target and find that (i) other characterisations of risk aversion than implied by the quadratic only affect dead-weight losses, unless there is multiplicative uncertainty; and (ii) asymmetries affect the optimal rule under both additive and multiplicative uncertainty but result in interest rate paths observationally similar, and in some cases equivalent, to those implied by a shifted quadratic. The results suggest that in the context of monetary policy-making the convenient assumption of quadratic losses may not be that drastic after all.
Keywords: Loss functions; Uncertainty; Optimal monetary policy rules (search for similar items in EconPapers)
JEL-codes: E42 E52 E61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
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Working Paper: Monetary policy loss functions: two cheers for the quadratic (1999)
Working Paper: Monetary policy loss functions: two cheers for the quadratic
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:9920
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