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Designing a simple loss function for central banks: Does a dual mandate make sense?

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dc.contributor.author Debortoli, Davide
dc.contributor.author Kim, Jinill
dc.contributor.author Lindé, Jesper
dc.contributor.author Nunes, Ricardo
dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
dc.date.accessioned 2020-05-25T09:26:56Z
dc.date.available 2020-05-25T09:26:56Z
dc.date.issued 2017-03-04
dc.identifier https://econ-papers.upf.edu/ca/paper.php?id=1560
dc.identifier.citation The Economic Journal, Vol.129, No 621, 2010-2038, July 2019, 10.1111/ecoj.12630
dc.identifier.uri http://hdl.handle.net/10230/33883
dc.description.abstract Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.relation.ispartofseries Economics and Business Working Papers Series; 1560
dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.title Designing a simple loss function for central banks: Does a dual mandate make sense?
dc.type info:eu-repo/semantics/workingPaper
dc.date.modified 2020-05-25T09:25:12Z
dc.subject.keyword central banks' objectives
dc.subject.keyword simple loss function
dc.subject.keyword monetary policy design
dc.subject.keyword sticky prices and sticky wages
dc.subject.keyword dsge models
dc.subject.keyword Macroeconomics and International Economics
dc.rights.accessRights info:eu-repo/semantics/openAccess


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