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Marcelo de C. Griebeler and Ronald Otto Hillbrecht
''Convexity of the central bank's loss function and dependence between monetary instruments''
( 2014, Vol. 34 No.4 )
In this paper we obtain conditions under which the central bank loss function is strictly convex in four different states of the economy: booming economy, recession, high inflation and high output. Moreover, we found that when inflation and output are linear functions of the monetary policy instrument, convexity is guaranteed for any of the four states mentioned. When we extend our analysis to the case of many instruments, we found that only linearity is not sufficient to guarantee the shape of loss function. Our results also provide conditions under which there exists dependence between instruments of monetary policy.
Keywords: loss function, convexity, monetary instruments
JEL: E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
C6 - Mathematical Methods and Programming: General
Manuscript Received : Aug 03 2014 Manuscript Accepted : Oct 24 2014

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