Monetary policy loss functions: two cheers for the quadratic
Following Blinder’s (1997) suggestion, we examine the implications for the optimal interest rate rule which follow from relaxing the assumption that the policymaker’s loss function is quadratic. We investigate deviations from quadratics for both symmetric and asymmetric preferences for a single target and find that (i) other characterizations of risk aversion than implied by the quadratic only affect dead-weight losses, unless there is multiplicative uncertainty; (ii) asymmetries affect the optimal rule under both additive and multiplicative uncertainty but result in interest rate paths observationally similar, and in some cases equivalent, to those implied by a shifted quadratic; (iii) the use of asymmetric loss functions leads to important insights on the issue of goal independence and monetary policy delegation; (iv) non-quadratic preferences, per se, are neither sufficient nor necessary to generate the ‘Brainard conservatism principle’ and thus do not offer much added value when analyzing policy issues of caution and gradualism. Our results suggest that in the context of monetary policymaking the convenient assumption of quadratic losses may not be that drastic after all.
|Date of creation:|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: https://www.uantwerp.be/en/faculties/applied-economic-sciences/
More information through EDIRC
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.:
- Peter F. Christoffersen & Francis X. Diebold, 1994.
"Optimal Prediction Under Asymmetric Loss,"
NBER Technical Working Papers
0167, National Bureau of Economic Research, Inc.
- Peter F. Christoffersen & Francis X. Diebold, 1997. "Optimal prediction under asymmetric loss," Working Papers 97-11, Federal Reserve Bank of Philadelphia.
- Peter F. Christoffersen & Francis X. Diebold, . "Optimal Prediction Under Asymmetric Loss," CARESS Working Papres 97-20, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
- Christoffersen & Diebold, . "Optimal Prediction Under Asymmetric Loss," Home Pages 167, 1996., University of Pennsylvania.
- Shiller, Robert J., 1999.
"Human behavior and the efficiency of the financial system,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 20, pages 1305-1340
- Robert J. Shiller, 1998. "Human Behavior and the Efficiency of the Financial System," Cowles Foundation Discussion Papers 1172, Cowles Foundation for Research in Economics, Yale University.
- Robert J. Shiller, 1998. "Human Behavior and the Efficiency of the Financial System," NBER Working Papers 6375, National Bureau of Economic Research, Inc.
- repec:cup:etheor:v:13:y:1997:i:6:p:808-17 is not listed on IDEAS
- Svensson, Lars E.O., 1997.
"Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets,"
615, Stockholm University, Institute for International Economic Studies.
- Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
- Svensson, Lars E O, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," CEPR Discussion Papers 1511, C.E.P.R. Discussion Papers.
- Svensson, L-E-O, 1996. "Inflation Forecast Targeting : Implementaing and Monitoring Inflation Targets," Papers 615, Stockholm - International Economic Studies.
- Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers 56, Bank of England.
- Lars E. O. Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," NBER Working Papers 5797, National Bureau of Economic Research, Inc.
- Horowitz, Ann R., 1987. "Loss functions and public policy," Journal of Macroeconomics, Elsevier, vol. 9(4), pages 489-504.
- James Tobin, 1989. "On the Theory of Macroeconomic Policy," Cowles Foundation Discussion Papers 931, Cowles Foundation for Research in Economics, Yale University.
- Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244.
When requesting a correction, please mention this item's handle: RePEc:ant:wpaper:1999002. 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: (Joeri Nys)
If references are entirely missing, you can add them using this form.