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A utility-based welfare criterion in a model with endogenous capital accumulation

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  • Rochelle M. Edge

Abstract

This paper extends the utility-based welfare criterion developed by Rotemberg and Woodford (1997) and Woodford (2003) to a model with endogenous capital accumulation. The welfare criterion obtained for this model shares several features with the corresponding expressions that have been derived in simpler models without capital accumulation. In particular, a criterion can be specified such that welfare losses depend solely on quadratic functions of the model's variables, thus confirming that policy should be oriented toward stabilization of macroeconomic aggregates, rather than toward attaining particular levels of those aggregates. That said, an important difference that obtains in this case is that the composition of output directly affects welfare in the endogenous-capital model--a result that is not present in standard treatments.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-66.

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Date of creation: 2003
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Handle: RePEc:fip:fedgfe:2003-66

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Keywords: Welfare;

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References

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  1. Katharine S. Neiss & Edward Nelson, 2001. "The real interest rate gap as an inflation indicator," Bank of England working papers 130, Bank of England.
  2. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
  3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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Cited by:
  1. Andres, Javier & Lopez-Salido, J. David & Nelson, Edward, 2005. "Sticky-price models and the natural rate hypothesis," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 1025-1053, July.
  2. Federico Ravenna & Carl E. Walsh, 2011. "Welfare-Based Optimal Monetary Policy with Unemployment and Sticky Prices: A Linear-Quadratic Framework," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 130-62, April.
  3. Malley, Jim & Philippopoulos, Apostolis & Woitek, Ulrich, 2009. "To react or not? Technology shocks, fiscal policy and welfare in the EU-3," European Economic Review, Elsevier, vol. 53(6), pages 689-714, August.
  4. Ippei Fujiwara & Yuki Teranishi, 2007. "A Dynamic New Keynesian Life-Cycle Model: Societal Ageing, Demographics and Monetary Policy," IMES Discussion Paper Series 07-E-04, Institute for Monetary and Economic Studies, Bank of Japan.
  5. Jim Malley & Apostolis Philippopoulos & Ulrich Woitek, 2007. "To React or Not? Fiscal Policy, Volatility and Welfare in the EU-3," Working Papers 2007_02, Business School - Economics, University of Glasgow.
  6. Boris Hofmann & Matthias Paustian, 2005. "The Persistence and Rigidity of wages and prices," Money Macro and Finance (MMF) Research Group Conference 2005 71, Money Macro and Finance Research Group.
  7. Arief Ramayandi, 2009. "Assessing Monetary Policy Efficiency in the ASEAN-5 Countries," Working Papers in Economics and Development Studies (WoPEDS) 200902, Department of Economics, Padjadjaran University, revised Mar 2009.
  8. Tommy Sveen & Lutz Weinke, 2009. "Firm-Specific Capital and Welfare," International Journal of Central Banking, International Journal of Central Banking, vol. 5(2), pages 147-179, June.
  9. Yuki Teranishi, 2008. "Optimal Monetary Policy under Staggered Loan Contracts," IMES Discussion Paper Series 08-E-08, Institute for Monetary and Economic Studies, Bank of Japan.
  10. Matthias Paustian, 2004. "Can Wage and Price Stickiness Account for Sizeable Costs of Business Cycle Fluctuations?," Bonn Econ Discussion Papers bgse18_2004, University of Bonn, Germany.
  11. Frank Hespeler, 2008. "Solution Algorithm to a Class of Monetary Rational Equilibrium Macromodels with Optimal Monetary Policy Design," Computational Economics, Society for Computational Economics, vol. 31(3), pages 207-223, April.

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