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Some implications of a quartic loss function

Aretz, Kevin and Peel, David (2007) Some implications of a quartic loss function. Economics Bulletin, 7 (13). pp. 1-7. ISSN 1545-2921

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    Abstract

    Motivated by a central banker with a symmetric but non-quadratic loss function, we show in this note that the approximations of two plausible loss functions of this type will include a quartic term. For skewed distributions, we establish that such a loss function implies a systematic inflation bias even when the bank targets the natural rate. Moreover, we show that the weights in an optimal combination of forecasts will differ from that under quadratic loss. We illustrate these differences using simulated data and data from the Livingston Surveys of Professional Forecasters.

    Item Type: Article
    Journal or Publication Title: Economics Bulletin
    Subjects: H Social Sciences > HB Economic Theory
    Departments: Lancaster University Management School > Accounting & Finance
    Lancaster University Management School > Economics
    ID Code: 31722
    Deposited By: Dr Kevin Aretz
    Deposited On: 10 Feb 2010 13:10
    Refereed?: Yes
    Published?: Published
    Last Modified: 23 Aug 2013 01:52
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/31722

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