Dear Professor jpfeifer,

I want to explore the effects of macroprudential policies through consumption compensation. In my model,

. I know to calculate the positive and negative signs of lmaba to judge whether the introduction of macro-prudential policies has brought about welfare improvement. I learned that welfare calculates the steady-state value. Then, my macro-prudential policy takes a countercyclical adjustment of the capital adequacy ratio, and the steady-state value of my macro-prudential policy model is the same as that of the benchmark model. Therefore, I think it is impossible to compare welfare losses through the consumption compensation method. May I ask, is there any other way to calculate the benefit comparison after the shock?

Best wishes.

Is there anyone else in the forum who can help me? I don’t know if it’s because I’m not clear enough? What I want to study is: Are macroprudential policies effective under exogenous shocks? Therefore, I need to compare the welfare losses of the two policies under exogenous shocks. However, I have only studied the central bank welfare loss method, and I want to use the consumption compensation method to study the welfare loss situation. But for now, I’ll only compare static welfare values using order=2. I would like to ask: Can the consumption compensation method compare the welfare loss under the shock? If so, can you give me some code to refer to?

Best wishes.

What do you mean with

? People typically compare conditional welfare at the steady state or unconditional welfare (search the forum, e.g. Welfare cost of business cycles - #10 by jpfeifer). Both will take the stochastic properties of the model into account. The resulting number (Welfare1 in your notation) is then transformed relative to a steady state object (welfare 0) that features no shocks at all. But that latter regime is just a comparison object.

I have a very similar question. In my model, I have a shock and various fiscal policies/fiscal measures to counteract the shock. I want to analyze which of these policies is the most effective in mitigating the shock for households. Therefore, I also considered using welfare as a corresponding measure for this purpose. So far, I have only found a similar approach in Hinterlang et al. 2024 (starting on page 38 in the appendix,

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4760092 )

. However, it seems to me that they calculate the welfare-equivalent consumption at each point in time after the shock. Is this a typical approach, or does anyone know of other examples?

I guess it depends on whether there exists one all-encapsulating number measuring the welfare in your experiment. Sometimes one number based on `t=0`

recursive welfare captures everything happening later. You need to decide whether that is the case in your experiment as well.