On the Welfare Costs of Misspecified Monetary Policy Objectives

Sanvi Avouyi-Dovi and Jean-Guillaume Sahuc

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Abstract: This paper quantifies the effects on welfare of misspecified monetary policy objectives in a stylized DSGE model. We show that using inappropriate objectives generates relatively large welfare costs. When expressed in terms of 'consumption equivalent' units, these costs correspond to permanent decreases in steady-state consumption of up to two percent. The latter are generated by both the inappropriate choice of weights and the omission of variables. In particular, it is costly to assume an interest-rate smoothing incentive for central bankers when it is not socially optimal to do so. Finally, a parameter uncertainty decomposition indicates that uncertainty about the properties of markup shocks gives rise to the largest welfare costs.

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Date: 2011
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Published in Journal of Macroeconomics, 2011, 33 (2), pp.151-161. ⟨10.1016/j.jmacro.2011.01.004⟩

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Journal Article: On the welfare costs of misspecified monetary policy objectives (2011)
Working Paper: On the Welfare Costs of Misspecified Monetary Policy Objectives (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01612707

DOI: 10.1016/j.jmacro.2011.01.004

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