01891cam a22002537 4500001000700000003000500007005001700012008004100029100002400070245010100094260006600195490004200261500001900303520080500322530006101127538007201188538003601260690006501296690008201361710004201443830007701485856003801562856003701600w10196NBER20140829083323.0140829s2003 mau||||fs|||| 000 0 eng d1 aSvensson, Lars E.O.10aOptimal Policy with Low-Probability Extreme Eventsh[electronic resource] /cLars E.O. Svensson. aCambridge, Mass.bNational Bureau of Economic Researchc2003.1 aNBER working paper seriesvno. w10196 aDecember 2003.3 aThe optimal policy response to a low-probability extreme event is examined. A simple policy problem is solved for a sequence of different loss functions: quadratic, combined quadratic/absolute-deviation, absolute-deviation, combined quadratic/constant, and perfectionist. The paper shows that, under some simplifying assumptions, each of these loss functions puts less weight on a low-probability extreme event than the previous one, down to the quadratic/constant and perfectionist loss functions, which completely ignores the low-probability extreme event. The case when the size of the extreme shock is endogenous and depends on the policy is also examined. This introduces an additional effect on the optimal policy except for the combined quadratic/constant and the perfectionist loss functions. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aE52 - Monetary Policy2Journal of Economic Literature class. 7aE58 - Central Banks and Their Policies2Journal of Economic Literature class.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w10196.4 uhttp://www.nber.org/papers/w1019641uhttp://dx.doi.org/10.3386/w10196