The introduction of linear-quadratic methods in monetary economics in the 1960s tinged the intense debate about the optimal monetary policy instrument. These methods were widely used outside monetary economics because they delivered easy solutions to complex stochastic models. This same reason explains the success of quadratic loss functions according to the conventional wisdom among monetary economists. In this traditional narrative, Henri Theil and Herbert Simon are often cited by their proofs that models with quadratic objective functions have the certainty equivalence property. This attribute made the solution of these models feasible for the computers available at that time. This paper shows how the use of a quadratic loss function to characterize the behavior of central banks inaugurated an objective or uniform way of talking about optimality. In this respect, the discourse on optimal monetary policy stabilized. Moreover, a richer account of the quadratic approach to monetary policy debate emerges by analyzing how quadratic loss functions were used in operations research and management problems by groups of scientists that included economists like Modigliani and Simon. I argue that feasibility is only one important factor that explains the wide popularity of quadratic functions in monetary economics.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Length: Date of creation: 2005 Date of revision: Handle: RePEc:anp:en2005:016
Contact details of provider: Postal: Secretaria da ANPEC Rua Tiradentes, 17 - Ingá Niterói, RJ 24210-510 Brazil Phone: 55 21 2621 1802 Fax: 55-11-3091-6073 Email: Web page: http://www.anpec.org.br More information through EDIRC
Order Information: Postal: Secretaria da ANPEC Rua Tiradentes, 17 - Ingá Niterói, RJ 24210-510 Brazil
For technical questions regarding this item, or to correct its listing, contact: (Hugo E. A. da Gama Cerqueira) The email address of this maintainer does not seem to be valid anymore. Please ask Hugo E. A. da Gama Cerqueira to update the entry or send us the correct address..
Related research
Keywords:
Find related papers by JEL classification: B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Quantitative and Mathematical
This paper has been announced in the following NEP Reports:
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: