You Might as Well be Hung for a Sheep as a Lamb: The Loss Function of an Agent
AbstractMost of those who take macro and monetary policy decisions are agents.� The worst penalty which can be applied to these agents is to sack them.� Agents thus have loss functions which are bounded above.� We work with a bell loss function which has this property.� With additive uncertainty the certainty equivalence which holds for a quadratic loss function breaks down with a bell loss function when there are two or more targets.� With multiplicative (Brainard) uncertainty policy is more conservative than in the absence of multiplicative uncertainty, but less so with the bell than the quadratic loss function.
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Date of creation: Jul 2002
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