Ordering policy rules with an unconditional welfare measure
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The unconditional expectation of social welfare is often used to assess alternative macroeconomic policy rules in applied quantitative research. It is shown that it is generally possible to derive a linear-quadratic problem that approximates the exact non-linear problem where the unconditional expectation of the objective is maximised and the steady-state is distorted. Thus, the measure of policy performance is a linear combination of second moments of economic variables which is relatively easy to compute numerically, and can be used to rank alternative policy rules. The approach is applied to a simple Calvo-type model under various monetary policy rules.
Damjanovic , V , Damjanovic , T & Nolan , C 2011 ' Ordering policy rules with an unconditional welfare measure ' School of Economics & Finance Discussion Paper , no. 1102 , University of St Andrews .
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