Designing a Simple Loss Function for Central Banks
Does a Dual Mandate Make Sense
Bibliographic Data
| ID | 9715729 |
|---|---|
| Authors | Davide Debortoli (0000-0001-8012-1790, UPF, CREI and Barcelona GSE), Jinill Kim (0000-0002-8265-7107, Korea University), Jesper Lindé (Sveriges Riksbank and CEPR, corresponding author), Ricardo Nunes (0000-0002-3157-0802, University of Surrey and CIMS) |
| Year | 2019 |
| Volume | 129 |
| Issue | 621 |
| Pages | 2010-2038 |
| Publication date | 2019-07-01 |
| Open Access | Yes |
| Type | ARTICLE |
| Venue | The Economic Journal (JOURNAL) |
| Journal identifiers | ISSN: 0013-0133 • E-ISSN: 1468-0297 |
| Publisher | Oxford University Press (OUP) (PUBLISHER) |
| DOI | 10.1111/ecoj.12630 |
| OpenAlex | W2598264471 |
| Language | EN |
| Citations received | 4 |
| References cited | 55 |
Yes, a dual mandate makes a lot of sense. This article 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, stabilising economic activity also stabilises 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 stabilising inflation and resource utilisation, and also when imposing a moderate degree of interest rate volatility
Deadweight loss · Econometrics · Economics · Elasticity of substitution · Inflation (cosmology · Interest rate · Mandate · Microeconomics · Monetary economics · Monetary policy · Monopolistic competition · Production (economics · Sense (electronics · Simple (philosophy · Volatility (finance · Welfare · Banking stability, regulation, efficiency · Economic Theory and Policy · Monetary Policy and Economic Impact
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| Citations per year | 0.8 |
|---|---|
| Citation span | 2021 - 2026 (6) |
| Highly cited | No |