Greetings to all and my sincere thanks to Professor pfeifer
I work under a small open economy to find the optimal combination between monetary and fiscal policies. I set a base for monetary policy, which includes two variables: inflation and the exchange rate. As for the fiscal policy base, it includes both government debt and budget deficit.
My question is how to formulate the appropriate loss function in this case
Please advise the professor pfeifer and thank you in advance
Only you as the model-builder can decide that. Often, loss functions are derived from the agents’ utility function. See e.g. Galí’s textbook.
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