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Ordering policy rules with an unconditional welfare measure

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  • Tatiana Damjanovic
  • Vladislav Damjanovic
  • Charles Nolan

Abstract

The unconditional expectation of social welfare is often used to assess alternative macroeconomic policy rules in applied quantative research. It is shown that it is generally possible to derive a linear-quadratic problem that approximates the exact non-linear porblem where the unconditional expectation of the objective is maximised and the steady- state is distorted. Thus, the measure of policy performance is a linear combination of second moments of economic variables which is relatively easy to compute numerically, and can be used to rank alternative policy rules. The approach is applied to a simple Calvo-type model under various monetary policy rules.

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Bibliographic Info

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2011_15.

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Date of creation: Mar 2011
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Handle: RePEc:gla:glaewp:2011_15

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Keywords: Linear-quadratic approximation.; unconditional expectations; optimal monetary policy; ranking simple policy rules.;

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  1. Pierpaolo Benigno & Michael Woodford, 2004. "Inflation stabilization and welfare: The case of a distorted steady state," Discussion Papers 0405-04, Columbia University, Department of Economics.
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  14. n/a, 2001. "A Timeless Perspective on Optimality in Forward-Looking Rational Expectations Models," NIESR Discussion Papers 154, National Institute of Economic and Social Research.
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