Linear-Quadratic Approximation to Unconditionally Optimal Policy: The Distorted Steady-State
AbstractThis 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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Bibliographic InfoPaper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 0804.
Date of creation: Mar 2008
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Unconditional expectations; Optimal monetary policy.;
Find related papers by JEL classification:
- E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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- NEP-ALL-2008-03-08 (All new papers)
- NEP-CBA-2008-03-08 (Central Banking)
- NEP-MAC-2008-03-08 (Macroeconomics)
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- NEP-OPM-2008-03-08 (Open Economy Macroeconomic)
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- Pierpaolo Benigno & Michael Woodford, 2008.
"Linear-Quadratic Approximation of Optimal Policy Problems,"
0809-01, Columbia University, Department of Economics.
- Benigno, Pierpaolo & Woodford, Michael, 2006. "Linear-Quadratic Approximation of Optimal Policy Problems," CEPR Discussion Papers 5964, C.E.P.R. Discussion Papers.
- Pierpaolo Benigno & Michael Woodford, 2006. "Linear-Quadratic Approximation of Optimal Policy Problems," NBER Working Papers 12672, National Bureau of Economic Research, Inc.
- Pierpaolo Benigno & Michael Woodford, 2006. "Linear-quadratic approximation of optimal policy problems," Discussion Papers 0607-02, Columbia University, Department of Economics.
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