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

Author

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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.

Suggested Citation

  • Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2008. "Linear-Quadratic Approximation to Unconditionally Optimal Policy: The Distorted Steady-State," CDMA Working Paper Series 200804, Centre for Dynamic Macroeconomic Analysis.
  • Handle: RePEc:san:cdmawp:0804
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    File URL: http://www.st-andrews.ac.uk/~wwwecon/CDMA/papers/wp0804.pdf
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    Cited by:

    1. Benigno, Pierpaolo & Woodford, Michael, 2012. "Linear-quadratic approximation of optimal policy problems," Journal of Economic Theory, Elsevier, vol. 147(1), pages 1-42.

    More about this item

    Keywords

    Unconditional expectations; Optimal monetary policy.;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - 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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