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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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File URL: http://www.sciencedirect.com/science/article/B6X4M-5236R54-1/2/445a50fac0961810dc6d5f31315e1ad4
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 33 (2011)
Issue (Month): 2 (June)
Pages: 151-161

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Handle: RePEc:eee:jmacro:v:33:y:2011:i:2:p:151-161

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: Welfare Monetary policy objectives DSGE model Bayesian econometrics;

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Find related papers by JEL classification:

• E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
• C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
• C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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