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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 1102.

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Date of creation: 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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  1. Christian Jensen & Bennett T. Mccallum, 2010. "Optimal Continuation versus the Timeless Perspective in Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1093-1107, 09.
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  14. Debortoli, Davide & Nunes, Ricardo, 2006. "On Linear Quadratic Approximations," MPRA Paper 544, University Library of Munich, Germany, revised Jul 2006.
  15. Jensen, Christian & McCallum, Bennett T., 2002. "The non-optimality of proposed monetary policy rules under timeless perspective commitment," Economics Letters, Elsevier, vol. 77(2), pages 163-168, October.
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  17. Paul Levine & Joseph Pearlman & Richard Pierse, 2007. "Linear-quadratic approximation, external habit and targeting rules," Working Paper Series 759, European Central Bank.
  18. Andrew P. Blake, 2001. "A `Timeless Perspective' on Optimality in Forward-Looking Rational Expectations Models," NIESR Discussion Papers 188, National Institute of Economic and Social Research.
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