Welfare ranking for simple rules


I need to rank the welfare for two different policy rules. I use the second-order approximation in Dynare v4.

Both consumption and leisure have lower variance under rule 2 than rule 1, which is consistent with the impulse responses. It implies that, I think, the welfare should be higher in rule 2 than rule 1.

However, the welfare ranking generated by Dynare is the opposite: welfare is higher in rule 1 than rule 2.

It is puzzling… Could anyone help me with this issue? Thank you very much!!


Hi Huixin,

Are you maximizing the lifetime utility of households? How do you measure the welfare under two policy rules? The common practice is to describe the welfare as the percentage of consumption that households would on average be willing to give up in order to avoid the consumption ‡fluctuations due to the nominal price stickiness. If you tell more about how you measure welfare, post your dynare output, I might be able to help you more.