IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Linear-Quadratic Approximation, Efficiency and Target-Implementability

  • Paul Levine

    (University of Surrey)

  • Joseph Pearlman

    (London Metropolitan University)

  • Richard Pierse

    (University of Surrey)

We examine linear-quadratic (LQ) approximation of stochastic dynamic optimization problems in macroeconomics (and elsewhere), in particular in policy analysis using Dynamic Stochastic General Equilibrium (DSGE) models. We first define the problem that is solved by a social planner, given that the objective of the latter is to maximize average welfare; this yields the efficient solution. We then comment on the LQ approximation when a tax or subsidy can be imposed such that the zero-inflation competitive steady state output level is equal to the efficient level. We then examine the correct procedure for replacing a stochastic non-linear dynamic optimization problem with a linear-quadratic approximation. We show that a procedure proposed by Benigno and Woodford (2004) for large underlying distortions in the economy can be more easily implemented through a second-order approximation of the Hamiltonian used to compute the ex ante optimal policy with commitment (the Ramsey problem). We then define the notion of Target-Implementability, which is also a sufficient condition for a particular steady-state maximum of the Ramsey problem, and explain the usefulness of this in the context of stabilization policy

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://repec.org/sce2006/up.25695.1141160133.pdf
Download Restriction: no

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 441.

as
in new window

Length:
Date of creation: 04 Jul 2006
Date of revision:
Handle: RePEc:sce:scecfa:441
Contact details of provider: Web page: http://comp-econ.org/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Michael Woodford & Pierpaolo Benigno, 2004. "Inflation Stabilization and Welfare: The Case of a Distorted Steady State," 2004 Meeting Papers 481, Society for Economic Dynamics.
  2. Clarida, Richard & Galí, Jordi & Gertler, Mark, 2002. "A Simple Framework for International Monetary Policy Analysis," CEPR Discussion Papers 3355, C.E.P.R. Discussion Papers.
  3. Faust, Jon & Svensson, Lars E O, 2001. "Transparency and Credibility: Monetary Policy with Unobservable Goals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(2), pages 369-97, May.
  4. Woodford Michael, 2002. "Inflation Stabilization and Welfare," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-53, February.
  5. Svensson, Lars E O, 2005. "Monetary Policy with Judgement: Forecast Targeting," CEPR Discussion Papers 5072, C.E.P.R. Discussion Papers.
  6. Benigno, Pierpaolo & Woodford, Michael, 2004. "Optimal monetary and fiscal policy: a linear-quadratic approach," Working Paper Series 0345, European Central Bank.
  7. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  8. Currie,David & Levine,Paul, 1993. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521441964.
  9. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
  10. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  11. Choudhary, M. Ali & Levine, Paul, 2006. "Idle worship," Economics Letters, Elsevier, vol. 90(1), pages 77-83, January.
  12. Kim, Jinill & Kim, Sunghyun Henry, 2003. "Spurious welfare reversals in international business cycle models," Journal of International Economics, Elsevier, vol. 60(2), pages 471-500, August.
  13. Batini, Nicoletta & Justiniano, Alejandro & Levine, Paul & Pearlman, Joseph, 2006. "Robust inflation-forecast-based rules to shield against indeterminacy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1491-1526.
  14. Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 0171, European Central Bank.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sce:scecfa:441. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.