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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.

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  • 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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    References listed on IDEAS

    1. Richard Layard, 2006. "Happiness and Public Policy: a Challenge to the Profession," Economic Journal, Royal Economic Society, vol. 116(510), pages 24-33, March.
    2. Coase, R H, 1976. "Adam Smith's Views of Man," Journal of Law and Economics, University of Chicago Press, vol. 19(3), pages 529-546, October.
    3. N. Emrah Aydinonat, 2006. "Is the Invisible Hand un− Smithian? A Comment on Rothschild," Economics Bulletin, AccessEcon, vol. 2(2), pages 1-9.
    4. Lisa Hill, 2001. "The hidden theology of Adam Smith," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 8(1), pages 1-29.
    5. A. M. C. Waterman, 2002. "Economics as Theology: Adam Smith's Wealth of Nations," Southern Economic Journal, Southern Economic Association, vol. 68(4), pages 907-921, April.
    6. repec:ebl:ecbull:v:2:y:2006:i:2:p:1-9 is not listed on IDEAS
    7. Brewer, Anthony, 1998. "Luxury and Economic Development: David Hume and Adam Smith," Scottish Journal of Political Economy, Scottish Economic Society, vol. 45(1), pages 78-98, February.
    8. Anthony Brewer, 1997. "An eighteenth-century view of economic development: Hume and Steuart," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 4(1), pages 1-22.
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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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