Certainty Equivalence and the Non-Vertical Long Run Phillips-Curve

9 Pages Posted: 6 Nov 1998

See all articles by Yvan Lengwiler

Yvan Lengwiler

University of Basel - Faculty of Business and Economics (WWZ)

Date Written: July 22, 1998

Abstract

The certainty equivalence principle states that only the mean of a random variable is relevant to a decision maker facing uncertainty. This principle simplifies the application of the idea of rational expectations considerably. Yet, certainty equivalence does not in general apply outside of the special case of quadratic objective function subject to linear constraints. I use the standard augmented Phillips-Curve to demonstrate the significant effects that occur with the breakdown of certainty equivalence.

JEL Classification: D82, E24, E31

Suggested Citation

Lengwiler, Yvan, Certainty Equivalence and the Non-Vertical Long Run Phillips-Curve (July 22, 1998). Federal Reserve Board FEDS Paper No. 98-36. Available at SSRN: https://ssrn.com/abstract=121431 or http://dx.doi.org/10.2139/ssrn.121431

Yvan Lengwiler (Contact Author)

University of Basel - Faculty of Business and Economics (WWZ) ( email )

Peter Merian-Weg 6
PO Box
Basel, CH-4002
Switzerland
+41 61 267 3369 (Phone)

HOME PAGE: http://wwz.unibas.ch/lengwiler

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