|Title: ||Monetary Policy Loss Functions: Two Cheers for the Quadratic|
|Authors: ||Schellekens, Philip|
Chadha, Jagjit S
|Issue Date: ||16-Jun-2004|
|Abstract: ||The authors examine the implications for the optimal interest rate rule that follow from relaxing the assumption that the policy-maker's loss function is quadratic. They investigate deviations from quadratics for both symmetric and asymmetric preferences for a single target and find that (i) other characterisations of risk aversion than implied by the quadratic only affect dead-weight losses, unless there is multiplicative uncertainty; and (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. The results suggest that in the context of monetary policy-making the convenient assumption of quadratic losses may not be that drastic after all.|
|Appears in Collections:||Cambridge Working Papers in Economics|
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