Arbeitspapier
Non-standard central bank loss functions, skewed risks, and certainty equivalence
This paper sets out to investigate the role of additive uncertainty under plausible non-standard central bank loss functions over future inflation. Building on a substantial body of evidence in the economic psychology literature, this paper postulates (i) period-by-period loss functions that are non-convex, I.e. displaying diminishing or non-increasing sensitivity to losses, and (ii) non-linear weighing of probabilities, hence departing from the expected utility paradigm. The main conclusion of the study is that if the additive uncertainty is caused by a non-normal distributed additive shock, for instance if the probability distribution of the shock is skewed, then with these departures from the quadratic function the principle of certainty equivalence does not hold anymore. Thus, it appears that with additive uncertainty of the non-normal type the assumption of a quadratic loss function for the central banker may not be as innocuous as it is commonly regarded.
- Sprache
-
Englisch
- Erschienen in
-
Series: ECB Working Paper ; No. 129
- Klassifikation
-
Wirtschaft
Monetary Policy
Central Banks and Their Policies
- Thema
-
certainty equivalence
economic psychology
monetary policy
non-quadratic loss functions
- Ereignis
-
Geistige Schöpfung
- (wer)
-
al-Nowaihi, Ali
Stracca, Livio
- Ereignis
-
Veröffentlichung
- (wer)
-
European Central Bank (ECB)
- (wo)
-
Frankfurt a. M.
- (wann)
-
2002
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:43 MEZ
Datenpartner
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Objekttyp
- Arbeitspapier
Beteiligte
- al-Nowaihi, Ali
- Stracca, Livio
- European Central Bank (ECB)
Entstanden
- 2002
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