Linear-Quadratic Approximation to Unconditionally Optimal Policy: The Distorted Steady-State
University of St. Andrews - School of Economics and Finance
University of St. Andrews - School of Management
University of St. Andrews
CDMA Working Paper No. 0804
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.
Number of Pages in PDF File: 32
Keywords: Unconditional expectations, Optimal monetary policy
JEL Classification: E20, E32, F32, F41
Date posted: March 26, 2008
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