Question: A central bank has the following loss function: L = (y t y e ) + ( t T ) 2 (13.1) Consult Chapter 13

A central bank has the following loss function: L = (yt ye) + (t T )2 (13.1) Consult Chapter 13 to answer the following questions:

(a) What can we interpret about the central bank's preferences from this loss function (Equation 13.1)?

(b) Briefly explain how this loss function compares to the standard loss function and a loss function with yT > ye.

(c) Find the inflation bias for a central bank with this loss function (Equation 13.1). [Hint: see Section 4.6 in Chapter 4].

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