A FEASIBLE AND OBJECTIVE CONCEPT OF OPTIMALITY: THE QUADRATIC LOSS FUNCTION AND U. S. MONETARY POLICY IN THE 1960's
The introduction of linear-quadratic methods in monetary economics in the 1960s tinged the intense debate about the optimal monetary policy instrument. These methods were widely used outside monetary economics because they delivered easy solutions to complex stochastic models. This same reason explains the success of quadratic loss functions according to the conventional wisdom among monetary economists. In this traditional narrative, Henri Theil and Herbert Simon are often cited by their proofs that models with quadratic objective functions have the certainty equivalence property. This attribute made the solution of these models feasible for the computers available at that time. This paper shows how the use of a quadratic loss function to characterize the behavior of central banks inaugurated an objective or uniform way of talking about optimality. In this respect, the discourse on optimal monetary policy stabilized. Moreover, a richer account of the quadratic approach to monetary policy debate emerges by analyzing how quadratic loss functions were used in operations research and management problems by groups of scientists that included economists like Modigliani and Simon. I argue that feasibility is only one important factor that explains the wide popularity of quadratic functions in monetary economics.
|Date of creation:||2005|
|Contact details of provider:|| Postal: Secretaria da ANPEC Rua Prof Marcos Valdemar de Freitas Reis s/n Campus do Gragoatá Bloco F Niterói, RJ 24210-201 Brazil|
Phone: 55 21 3674 7952
Web page: http://www.anpec.org.br
More information through EDIRC
|Order Information:|| Postal: Secretaria da ANPEC Rua Prof Marcos Valdemar de Freitas Reis s/n Campus do Gragoatá Bloco F Niterói, RJ 24210-201 Brazil|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Waud, Roger N, 1976.
"Asymmetric Policymaker Utility Functions and Optimal Policy Under Uncertainty,"
Econometric Society, vol. 44(1), pages 53-66, January.
- Roger N. Waud, 1975. "Asymmetric policymaker utility functions and optimal policy under uncertainty," Special Studies Papers 57, Board of Governors of the Federal Reserve System (U.S.).
- Friedman, Benjamin Morton, 1972. "Optimal Economic Stabilization Policy: An Extended Framework," Scholarly Articles 4554308, Harvard University Department of Economics.
- Taylor, John B., 2001. "An Interview With Milton Friedman," Macroeconomic Dynamics, Cambridge University Press, vol. 5(01), pages 101-131, February.
- William A. Barnett, 2001. "A Conversation with Henri (Hans) Theil: His Experiences in the Netherlands during the Second World War," Econometrics 0111001, EconWPA.
- William Barnett, 2012. "A Conversation with Henri (Hans) Theil: His Experiences in the Netherlands during the Second World War," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201233, University of Kansas, Department of Economics, revised Sep 2012.
- W. W. Cooper, 1955. "Presidential Address to TIMS," Management Science, INFORMS, vol. 1(2), pages 183-186, January.
- repec:cup:macdyn:v:5:y:2001:i:1:p:101-31 is not listed on IDEAS
- Friedman, Benjamin M, 1972. "Optimal Economic Stabilization Policy: An Extended Framework," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 1002-1022, Sept.-Oct.
- Chow, Gregory C, 1970. "Optimal Stochastic Control of Linear Economic Systems," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(3), pages 291-302, August.
- W. W. Cooper, 1951. "A Proposal for Extending the Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 65(1), pages 87-109.
- Charles C. Holt & Franco Modigliani & Herbert A. Simon, 1955. "A Linear Decision Rule for Production and Employment Scheduling," Management Science, INFORMS, vol. 2(1), pages 1-30, October.
- Charles C. Holt & Franco Modigliani & John F. Muth, 1956. "Derivation of a Linear Decision Rule for Production and Employment," Management Science, INFORMS, vol. 2(2), pages 159-177, January.
- Poole, William, 1975. "The 1975 Report of the President's Council of Economic Advisers: Long on Analysis, Short on Policy," American Economic Review, American Economic Association, vol. 65(4), pages 539-547, September.
- L. Wheaton Smith, Jr., 1956. "Current Status of the Industrial Use of Linear Programming," Management Science, INFORMS, vol. 2(2), pages 156-158, January.
- Sargent, Thomas J & Wallace, Neil, 1973. "Rational Expectations and the Dynamics of Hyperinflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 328-350, June.
- Mirowski,Philip, 2002. "Machine Dreams," Cambridge Books, Cambridge University Press, number 9780521772839, October.
- Thomas J. Sargent, 1971. "The Optimum Monetary Instrument Variable in a Linear Economic Model," Canadian Journal of Economics, Canadian Economics Association, vol. 4(1), pages 50-60, February.
- E. C. Hope, 1953. "Discussion," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 2(1), pages 86-88, 03.
- Kareken, John H, 1970. "The Optimum Monetary Instrument Variable: A Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(3), pages 385-390, August.
- Mirowski,Philip, 2002. "Machine Dreams," Cambridge Books, Cambridge University Press, number 9780521775267, October.
- Muench, Thomas & Wallace, Neil, 1974. "On Stabilization Policy: Goals and Models," American Economic Review, American Economic Association, vol. 64(2), pages 330-337, May.
- William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
- Holbrook, Robert S & Shapiro, Harold, 1970. "The Choice of Optimal Intermediate Economic Targets," American Economic Review, American Economic Association, vol. 60(2), pages 40-46, May. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:anp:en2005:016. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rodrigo Zadra Armond)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.