A Feasible and Objective Concept of Optimal Monetary Policy: The Quadratic Loss Function in the Postwar Period

Título: A Feasible and Objective Concept of Optimal Monetary Policy: The Quadratic Loss Function in the Postwar Period

Autor: DUARTE, Pedro Garcia.

Resumo: Monetary economists argue that they adopted quadratic loss functions because the latter delivered easy solutions to complex stochastic models. In that narrative, Simon (1956) and Theil (1957) are mentioned by their proofs that models with quadratic objective functions have the certainty equivalence property, which made their solutions feasible for the computers available at that time. Appearing in that narrative are Poole (1970) and Sargent and Wallace (1975), who were among the first to apply the tool to monetary economics. In this article I argue that in addition to offering “solutions feasibility,” the use of a quadratic loss function to characterize the behavior of central banks also inaugurated an objective way of talking about optimality. In this respect, the tool stabilized the discourse on optimal monetary policy.

Ano: 2009

Periódico: History of Political Economy

Edição: Volume 41, no. 1, p. 1-55

Palavras-chave: função de perda quadrática; política monetária ótima; Herbert Simon; Henri Theil; William Poole