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The Macroeconomic Loss Function: A Critical Note


  • Thomas Mayer

    (Department of Economics, University of California Davis)


The standard loss function gives the same weight to positive and negative deviations from the output and inflation targets. This short note criticizes this symmetry assumption. If the period covered is long enough output growth in excess of the target, and often also inflation rates that are below target, should be counted as gains instead of losses.

Suggested Citation

  • Thomas Mayer, 2003. "The Macroeconomic Loss Function: A Critical Note," Working Papers 22, University of California, Davis, Department of Economics.
  • Handle: RePEc:cda:wpaper:02-2

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    References listed on IDEAS

    1. Horowitz, Ann R., 1987. "Loss functions and public policy," Journal of Macroeconomics, Elsevier, vol. 9(4), pages 489-504.
    2. Waud, Roger N, 1976. "Asymmetric Policymaker Utility Functions and Optimal Policy Under Uncertainty," Econometrica, Econometric Society, vol. 44(1), pages 53-66, January.
    3. Cecchetti, Stephen G, 2000. "Making Monetary Policy: Objectives and Rules," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 43-59, Winter.
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    Cited by:

    1. Efrem Castelnuovo, 2003. "Taylor Rules and Interest Rate Smoothing in the US and EMU," Macroeconomics 0303002, EconWPA.
    2. Efrem Castelnuovo, 2007. "Taylor Rules And Interest Rate Smoothing In The Euro Area," Manchester School, University of Manchester, vol. 75(1), pages 1-16, January.

    More about this item


    Loss functions; macro policy evaluation;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications


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