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A utility-based welfare criterion in a model with endogenous capital accumulation

  • Rochelle M. Edge

This paper extends the utility-based welfare criterion developed by Rotemberg and Woodford (1997) and Woodford (2003) to a model with endogenous capital accumulation. The welfare criterion obtained for this model shares several features with the corresponding expressions that have been derived in simpler models without capital accumulation. In particular, a criterion can be specified such that welfare losses depend solely on quadratic functions of the model's variables, thus confirming that policy should be oriented toward stabilization of macroeconomic aggregates, rather than toward attaining particular levels of those aggregates. That said, an important difference that obtains in this case is that the composition of output directly affects welfare in the endogenous-capital model--a result that is not present in standard treatments.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-66.

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Date of creation: 2003
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Handle: RePEc:fip:fedgfe:2003-66
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  1. Katharine S. Neiss & Edward Nelson, 2001. "The real interest rate gap as an inflation indicator," Bank of England working papers 130, Bank of England.
  2. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
  3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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