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A Feasible and Objective Concept of Optimal Monetary Policy: The Quadratic Loss Function in the Postwar Period


  • Pedro Garcia Duarte


Monetary economists argue that they adopted quadratic loss functions because the latter delivered easy solutions to complex stochastic models. In that narrative, Simon (1956) and Theil (1957) are mentioned by their proofs that models with quadratic objective functions have the certainty equivalence property, which made their solutions feasible for the computers available at that time. Appearing in that narrative are Poole (1970) and Sargent and Wallace (1975), who were among the first to apply the tool to monetary economics. In this article I argue that in addition to offering “solutions feasibility,” the use of a quadratic loss function to characterize the behavior of central banks also inaugurated an objective way of talking about optimality. In this respect, the tool stabilized the discourse on optimal monetary policy.

Suggested Citation

  • Pedro Garcia Duarte, 2009. "A Feasible and Objective Concept of Optimal Monetary Policy: The Quadratic Loss Function in the Postwar Period," History of Political Economy, Duke University Press, vol. 41(1), pages 1-55, Spring.
  • Handle: RePEc:hop:hopeec:v:41:y:2009:i:1:p:1-55

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    Cited by:

    1. Chatelain, Jean-Bernard & Ralf, Kirsten, 2017. "Can we Identify the Fed's Preferences?," EconStor Preprints 149993, ZBW - German National Library of Economics.
    2. Pedro Garcia Duarte, 2011. "Recent Developments in Macroeconomics: The DSGE Approach to Business Cycles in Perspective," Chapters,in: The Elgar Companion to Recent Economic Methodology, chapter 16 Edward Elgar Publishing.
    3. Judy L Klein, 2015. "The Cold War Hot House for Modeling Strategies at the Carnegie Institute of Technology," Working Papers Series 19, Institute for New Economic Thinking.

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    quadratic loss function;


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