Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/215444
Authors: 
Debortoli, Davide
Kim, Jinill
Lindé, Jesper
Nunes, Ricardo
Year of Publication: 
2019
Series/Report no.: 
Sveriges Riksbank Working Paper Series No. 366
Abstract: 
Yes, it makes a lot of sense. This paper 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, stabilizing economic activity also stabilizes 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 stabilizing inflation and resource utilization, and also when imposing a moderate degree of interest rate volatility.
Subjects: 
Central banks' objectives
simple loss function
monetary policy design
sticky prices and sticky wages
DSGE models
JEL: 
C32
E58
E61
Document Type: 
Working Paper

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