Optimal Stabilization Policy Under Governmental Risk Aversion

摘要

Governmental stabilization policies take account of the underlying risk aversion of its voters. A utility function for the government is defined, one which includes variances of national income changes with respect to its policy instruments- here the budget variable, the bond rate of interest, and the currency-exchange rate. The consequence of this for the optimal set of policies is a target level of national income less than what a risk-neutral government aims at. This applies to an open economy when this is a key-currency country, as it need attend to balance-of-payments effects only insofar as they affect national income. The non-key-currency country, by contrast, must take account directly of balance-of-payments effects and their variance, so it reaches a lower level of utility than the key-currency country.