Utility functions for central bankers: the not so drastic quadratic

Schellekens, Phillip and Chadha, Jagjit (1998) Utility functions for central bankers: the not so drastic quadratic. Financial Markets Group Discussion Papers (308). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

Following Blinder's (1997) suggestion, we examine the implications for the optimal interest rate rule which follow from relaxing the assumption that the policymaker's loss function is quadratic. We investigate deviations from quadratics for both symmetric and asymmetric preferences for a single target and find that (i) other characterizations of risk aversion than implied by the quadratic only affect dead-weight losses, unless there is multiplicative uncertainty; (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; (iii) the use of asymmetric loss functions leads to important insights on the issue of goal independence and monetary policy delegation; (iv) non-quadratic preferences, per se, are neither sufficient nor necessary to generate the ‘Brainard conservatism principle' and thus do not offer much added value when analyzing policy issues of caution and gradualism. Our results suggest that in the context of monetary policymaking the convenient assumption of quadratic losses may not be that drastic after all.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 1998 The Authors
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects) E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Date Deposited:	04 Jul 2023 23:04
Last Modified:	14 Sep 2024 04:34
URI:	http://eprints.lse.ac.uk/id/eprint/119136

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