), and the growth rate of output improves welfare significantly. And the results hold up when imposing realistic limitations on the extent to which monetary policy makers change policy interest rates. Moreover, among these measures, a suitably chosen weight on the model-consistent output gap delivers the lowest welfare loss. Specifically, we find that in a simple loss function—with the weight on annualized inflation normalized to unity—the optimized weight on the output gap is about 1. This value is considerably higher than the reference value of 0.048 derived in
,” Journal of Money, Credit and Banking , Vol. 39 , No. 2-3 , pp. 319 – 349 . Debortoli , Davide , Jinill Kim , Jesper Lindé , and Ricardo Nunes , 2018 , “ Designing a Simple Loss Function for Central Banks: Does a Dual Mandate Make Sense? ” The Economic Journal . Draghi , Mario , 2016 , “ Delivering a symmetric mandate with asymmetric tools: monetary policy in a context of low interest rates,” Speech , Oesterreichische Nationalbank , Vienna . Erceg , Christopher J. , Dale W. Henderson , and Andrew T. Levin , 2000
and Valencia (2012) 8 Conclusions References Appendix A A Markov process for crisis and non-crisis states B The logistic function C The simple loss function D The effect of the policy rate on the crisis increase in the unemployment rate E Kocherlakota on the value of eliminating the possibility of a crisis F The reduction of the probability of a crisis per expected non-crisis unemployment gap increase for each quarter G The case of a random crisis increase in the unemployment rate H The debt-to-GDP term in Schularick and Taylor (2012, table