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Uncovering Policy Makers' Loss Function

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  • Paolo Surico

    (Bocconi University)

Abstract

The quadratic form of policy makers' loss function has gained a wide consensus in monetary policy analysis mainly because of its analytical tractability. A number of researchers, however, have recently proposed alternative functional forms which have also proved to yield tractable solutions of the central bank optimization problem. Using a nonparametric specification of the output gap argument into the loss function, this paper attempts to discriminate among three classes of proposals through the evidence drawn upon the form of the US efficient policy frontier.

Suggested Citation

  • Paolo Surico, 2002. "Uncovering Policy Makers' Loss Function," Macroeconomics 0210003, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0210003
    Note: Type of Document - tex; prepared on pc; to print on hp; pages: 9; figures: included
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0210/0210003.pdf
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    References listed on IDEAS

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    3. Pagan,Adrian & Ullah,Aman, 1999. "Nonparametric Econometrics," Cambridge Books, Cambridge University Press, number 9780521355643, October.
    4. Cukierman, A., 1999. "The Inflation Bias Result Revisited," Papers 38-99, Tel Aviv.
    5. Nobay, A. Robert & Peel, David, 1998. "Optimal monetary policy in a model of asymmetric central bank preferences," LSE Research Online Documents on Economics 119138, London School of Economics and Political Science, LSE Library.
    6. Alex Cukierman & Anton Muscatelli, 2001. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability?," Working Papers 2002_4, Business School - Economics, University of Glasgow, revised Mar 2002.
    7. Ruge-Murcia, Francisco J., 2004. "The inflation bias when the central bank targets the natural rate of unemployment," European Economic Review, Elsevier, vol. 48(1), pages 91-107, February.
    8. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    9. Cecchetti, Stephen G, 2000. "Making Monetary Policy: Objectives and Rules," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 16(4), pages 43-59, Winter.
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    Cited by:

    1. Paolo Surico, 2008. "Measuring the Time Inconsistency of US Monetary Policy," Economica, London School of Economics and Political Science, vol. 75(297), pages 22-38, February.
    2. Petra Gerlach-Kristen, 2009. "Outsiders at the Bank of England's MPC," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1099-1115, September.

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    More about this item

    Keywords

    nonquadratic loss function; efficient policy frontier; kernel regression;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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