Asymmetric Loss Functions and Fiscal Policy Planning

Fiscal policy planning should assume a bad case scenario. So says Mark Thoma:Romer roundtable: Assume the worst: WHEN deciding between two alternatives such as whether the government should intervene in the economy with a fiscal stimulus or not, the choice of the null and alternative hypotheses influences the type of errors we are likely to make…. Which is the bigger error, to deficit spend when it’s not needed, or to fail to do so when it is? I think the bigger risk is doing nothing when it’s needed…So say we all!

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