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Linear-Quadratic Approximation to Unconditionally Optimal Policy: The Distorted Steady-State

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  • Tatiana Damjanovic

    ()

  • Vladislav Damjanovic

    ()

  • Charles Nolan

    ()

Abstract

This paper establishes that one can generally obtain a purely quadratic approximation to the unconditional expectation of social welfare when the steady-state is distorted. A specific example is provided employing a canonical New Keynesian model. Unlike in the non-distorted steady state case, the approximate loss function is not defined simply over terms in inflation and output. Furthermore, optimal steady state inflation and the nominal interest rate are positive.

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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/wp0804.pdf
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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200804.

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Date of creation: 15 Mar 2008
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Handle: RePEc:san:cdmawp:0804

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Keywords: Unconditional expectations; Optimal monetary policy.;

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