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Ordering policy rules with an unconditionalwelfare 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 quantitative research. It is shown that it is generally possible to derive a linear-quadratic problem that approximates the exact non-linear problem 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 Department of Economics, University of St. Andrews in its series Discussion Paper Series, Department of Economics with number 201102.

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Date of creation: 15 Feb 2011
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Handle: RePEc:san:wpecon:1102

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Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
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Web page: http://www.st-andrews.ac.uk/economics/
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Keywords: Linear-quadratic approximation; unconditional expectations; optimal monetary policy; ranking simple policy rules.;

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