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Optimal Stabilization Policy Under Governmental Risk Aversion

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  • Franz Gehrels

Abstract

Governmental stabilization policies take account of the underlying risk aversion of its voters. A utility function for the government is defined, one which includes variances of national income changes with respect to its policy instruments—here the budget variable, the bond rate of interest, and the currency-exchange rate. The consequence of this for the optimal set of policies is a target level of national income less than what a risk-neutral government aims at. This applies to an open economy when this is a key-currency country, as it need attend to balance-of-payments effects only insofar as they affect national income. The non-key-currency country, by contrast, must take account directly of balance-of-payments effects and their variance, so it reaches a lower level of utility than the key-currency country. Copyright International Atlantic Economic Society 2010

Suggested Citation

  • Franz Gehrels, 2010. "Optimal Stabilization Policy Under Governmental Risk Aversion," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 38(4), pages 411-415, December.
    • Handle: RePEc:kap:atlecj:v:38:y:2010:i:4:p:411-415
    DOI: 10.1007/s11293-010-9250-2
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    References listed on IDEAS

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    1. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
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    More about this item

    Keywords

    Optimal policies; Risk aversion; Income stabilization; E50; E62; F49;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F49 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Other

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