Dear Michel,
I have repeatedly used the optimal simple rule (osr) routine in linearized NNS models with a loss function over inflation and output.
Dealing with non-linear models now raises some questions, and I am not sure whether I have properly understood the manual on these issues.
I am looking for the optimal simple policy under a standard utility function, where
W (wealth) is the discounted sum of period utility, and
U = U© – d*U(N)
is period utility as the sum of consumption utility U© and the weighted (d) disutility of labour U(N).
As I understood
optim_weights;
x a; pie b;
end;
minimizes the LOSS function L = ax^2 + bpie^2.
Therefore
-
Maximizing WELFARE should be written as MINIMIZING the inverse of the welfare measure (or the deviation from flexprice or steady state welfare)?
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Does osr focus on welfare as the discounted sum of period utility, or does it look at period utility and discounts it itself? Put differently, should I use W or U in the optim_weights expression?
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Supposed that I use U instead of W, the weights in optim_weights may be expressed as either
U 1; (i.e. using period utility)
or
U© 1; U(N) –d; (i.e. stating the two components of period utility separately)
Is there any reason to prefer one version over the other?
Thanks a lot!
Lukas