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The Macroeconomic Loss Function: A Critical Note

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  • Thomas Mayer

    (Department of Economics, University of California Davis)

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    Abstract

    The standard loss function gives the same weight to positive and negative deviations from the output and inflation targets. This short note criticizes this symmetry assumption. If the period covered is long enough output growth in excess of the target, and often also inflation rates that are below target, should be counted as gains instead of losses.

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    Bibliographic Info

    Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 22.

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    Length: 6
    Date of creation: 16 Jan 2003
    Date of revision:
    Handle: RePEc:cda:wpaper:02-2

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    Related research

    Keywords: Loss functions; macro policy evaluation;

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    1. Waud, Roger N, 1976. "Asymmetric Policymaker Utility Functions and Optimal Policy Under Uncertainty," Econometrica, Econometric Society, vol. 44(1), pages 53-66, January.
    2. Cecchetti, Stephen G, 2000. "Making Monetary Policy: Objectives and Rules," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 43-59, Winter.
    3. Horowitz, Ann R., 1987. "Loss functions and public policy," Journal of Macroeconomics, Elsevier, vol. 9(4), pages 489-504.
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