IDEAS home Printed from https://ideas.repec.org/p/fmg/fmgdps/dp308.html
   My bibliography  Save this paper

Utility Functions For Central Bankers: The Not So Drastic Quadratic

Author

Listed:
  • Jagjit Chadha
  • Philip Schellekens

Abstract

Following Blinders (1997) suggestion, we examine the implications for the optimal interest rate rule which follows from relaxing the assumption that the policymakers 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.

Suggested Citation

  • Jagjit Chadha & Philip Schellekens, 1998. "Utility Functions For Central Bankers: The Not So Drastic Quadratic," FMG Discussion Papers dp308, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp308
    as

    Download full text from publisher

    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp308.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, Decembrie.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Graham Elliott & Ivana Komunjer & Allan Timmermann, 2008. "Biases in Macroeconomic Forecasts: Irrationality or Asymmetric Loss?," Journal of the European Economic Association, MIT Press, vol. 6(1), pages 122-157, March.
    2. Weitzman Nagar, 2007. "Asymmetry in Monetary Policy: An Asymmetric Objective Function and a New-Keynesian Model," Bank of Israel Working Papers 2007.02, Bank of Israel.
    3. Virginie Boinet & Christopher Martin, 2008. "Targets, zones, and asymmetries: a flexible nonlinear model of recent UK monetary policy," Oxford Economic Papers, Oxford University Press, vol. 60(3), pages 423-439, July.
    4. Charles Goodhart & Margaret Bray, 2002. "You Might as Well be Hung for a Sheep as a Lamb: The Loss Function of an Agent," FMG Discussion Papers dp418, Financial Markets Group.
    5. Margaret Bray & Charles Goodhart, 2008. "‘You Might As Well Be Hung For A Sheep As A Lamb’: The Loss Function Of An Agent," Manchester School, University of Manchester, vol. 76(3), pages 279-300, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jonathan Gruber & Aaron Yelowitz, 1999. "Public Health Insurance and Private Savings," Journal of Political Economy, University of Chicago Press, vol. 107(6), pages 1249-1274, December.
    2. Cristóbal Huneeus & Andrea Repetto, 2005. "The Dynamics of Earnings in Chile," Central Banking, Analysis, and Economic Policies Book Series, in: Jorge Restrepo & Andrea Tokman R. & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Edi (ed.),Labor Markets and Institutions, edition 1, volume 8, chapter 12, pages 383-410, Central Bank of Chile.
    3. Lusardi, Annamaria, 1997. "Precautionary saving and subjective earnings variance," Economics Letters, Elsevier, vol. 57(3), pages 319-326, December.
    4. Fatih Ozatay, 2008. "Expansionary Fiscal Consolidations: New Evidence from Turkey," Working Papers 0805, TOBB University of Economics and Technology, Department of Economics.
    5. Guy Stecklov & Paul Winters & Marco Stampini & Benjamin Davis, 2003. "Can Public Transfers Reduce Mexican Migration? A study based on randomized experimental data," Working Papers 03-16, Agricultural and Development Economics Division of the Food and Agriculture Organization of the United Nations (FAO - ESA).
    6. Das, Marcel & van Soest, Arthur, 1999. "A panel data model for subjective information on household income growth," Journal of Economic Behavior & Organization, Elsevier, vol. 40(4), pages 409-426, December.
    7. Francesco Devicienti & Valentina Gualtieri & Mariacristina Rossi, 2014. "The Persistence Of Income Poverty And Lifestyle Deprivation: Evidence From Italy," Bulletin of Economic Research, Wiley Blackwell, vol. 66(3), pages 246-278, July.
    8. Melitz, Jacques & Zumer, Frederic, 1999. "Interregional and international risk-sharing and lessons for EMU," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 51(1), pages 149-188, December.
    9. Augendra BHUKUTH & Jérôme BALLET & Bako Nirina RABEVOHITRA & Patrick RASOLOFO, 2014. "Analysing the Effects of Crop Shocks on Child Work: the Case of the Morondava District in Madagascar," Cahiers du GREThA (2007-2019) 2014-17, Groupe de Recherche en Economie Théorique et Appliquée (GREThA).
    10. Luc Arrondel & André Masson, 2013. "Measuring savers' preferences how and why?," PSE Working Papers halshs-00834203, HAL.
    11. CHADHA, Jagjit & SCHELLEKENS, Philip, "undated". "Monetary policy loss functions: two cheers for the quadratic," Working Papers 1999002, University of Antwerp, Faculty of Business and Economics.
    12. Söderlind, Paul, 1995. "Forward Interest Rates as Indicators of Inflation Expectations," CEPR Discussion Papers 1313, C.E.P.R. Discussion Papers.
    13. Kim, H. Youn, 2017. "The permanent income hypothesis, transitional dynamics, and excess sensitivity of consumption," Structural Change and Economic Dynamics, Elsevier, vol. 40(C), pages 10-25.
    14. Néstor Gandelman, 2015. "A Comparison of Saving Rates: Micro Evidence from Seventeen Latin American and Caribbean Countries," IDB Publications (Working Papers) 90556, Inter-American Development Bank.
    15. repec:tiu:tiutis:bdbe10dd-649c-4521-ab28-7aa051a5bf82 is not listed on IDEAS
    16. repec:zbw:bofrdp:1997_008 is not listed on IDEAS
    17. Alessie, Rob & Lusardi, Annamaria, 1997. "Saving and income smoothing: Evidence from panel data," European Economic Review, Elsevier, vol. 41(7), pages 1251-1279, July.
    18. Manuel Arellano & Stéphane Bonhomme & Micole De Vera & Laura Hospido & Siqi Wei, 2022. "Income risk inequality: Evidence from Spanish administrative records," Quantitative Economics, Econometric Society, vol. 13(4), pages 1747-1801, November.
    19. Vincent (Vincent Peter) Hogan & Patrick O'Sullivan, 2003. "Consumption and house prices in Ireland," Open Access publications 10197/330, School of Economics, University College Dublin.
    20. Mervyn Allister King, 1993. "Debt Deflation: Theory and Evidence," FMG Discussion Papers dp175, Financial Markets Group.
    21. Frédéric Zumer & Jacques Mélitz, 2002. "Partage du risque dans l'Union européenne. Expériences interrégionales et internationales," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 299-323.
    22. David E. Bloom & David Canning & Bryan Graham, 2003. "Longevity and Life‐cycle Savings," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(3), pages 319-338, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fmg:fmgdps:dp308. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: The FMG Administration (email available below). General contact details of provider: http://www.lse.ac.uk/fmg/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.