Ordering policy rules with an unconditional welfare measure

Abstract

The unconditional expectation of social welfare is often used to assess alternative macroeconomic policy rules in applied quantitative research. This paper provides a detailed analysis of such policies. It sets out the unconditionally optimal (UO) policy problem and derives a linear-quadratic (LQ) version of that problem that approximates the exact non-linear problem. The properties of UO policies are analyzed through a series of examples and contrasted with the timeless perspective (TP), exposited in Benigno and Woodford (2012). Some substantive implications for optimal monetary policy are explored.