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Optimal Stabilization Policy Under Governmental Risk Aversion


  • Franz Gehrels



Governmental stabilization policies take account of the underlying risk aversion of its voters. A utility function for the government is defined, one which includes variances of national income changes with respect to its policy instruments—here the budget variable, the bond rate of interest, and the currency-exchange rate. The consequence of this for the optimal set of policies is a target level of national income less than what a risk-neutral government aims at. This applies to an open economy when this is a key-currency country, as it need attend to balance-of-payments effects only insofar as they affect national income. The non-key-currency country, by contrast, must take account directly of balance-of-payments effects and their variance, so it reaches a lower level of utility than the key-currency country. Copyright International Atlantic Economic Society 2010

Suggested Citation

  • Franz Gehrels, 2010. "Optimal Stabilization Policy Under Governmental Risk Aversion," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 38(4), pages 411-415, December.
  • Handle: RePEc:kap:atlecj:v:38:y:2010:i:4:p:411-415
    DOI: 10.1007/s11293-010-9250-2

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    References listed on IDEAS

    1. Merton H. Miller & Daniel Orr, 1966. "A Model of the Demand for Money by Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 80(3), pages 413-435.
    2. Foley, Duncan K, 1975. "On Two Specifications of Asset Equilibrium in Macroeconomic Models," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 303-324, April.
    3. Hugh Rose, 1957. "Liquidity Preference and Loanable Funds," Review of Economic Studies, Oxford University Press, vol. 24(2), pages 111-119.
    4. Birch, Dan E & Rabin, Alan A & Yeager, Leland B, 1982. "Inflation, Output, and Employment: Some Clarifications," Economic Inquiry, Western Economic Association International, vol. 20(2), pages 209-221, April.
    5. David Laidler, 1987. ""Buffer-stock" money and the transmission mechanism," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 11-23.
    6. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
    7. May, Josef, 1970. "Period analysis and continuous analysis in Patinkin's macroeconomic model," Journal of Economic Theory, Elsevier, vol. 2(1), pages 1-9, March.
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    9. Cliff L. Lloyd, 1960. "The Equivalence of the Liquidity Preference and Loanable Funds Theories and the New Stock-Flow Analysis," Review of Economic Studies, Oxford University Press, vol. 27(3), pages 206-209.
    10. Tucker, Donald P, 1971. "Macroeconomic Models and the Demand for Money under Market Disequilibrium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(1), pages 57-83, February.
    11. Leland B. Yeager, 1994. "Tautologies in Economics and the Natural Sciences," Eastern Economic Journal, Eastern Economic Association, vol. 20(2), pages 157-169, Spring.
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    More about this item


    Optimal policies; Risk aversion; Income stabilization; E50; E62; F49;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F49 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Other


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