(Carlin & Soskice)

The loss function

Central bank has the following loss function:

L=(ytye)+(tT)2(13.1) Consult Chapter 13 to answer the following questions:

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

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

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