Abstract

http://ssrn.com/abstract=1112088
 
 

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


Tatiana Damjanovic


University of St. Andrews - School of Economics and Finance

Vladislav Damjanovic


University of Saint Andrews - School of Economics & Management

Charles Nolan


University of St. Andrews

February 2008

CDMA Working Paper No. 0804

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.

Number of Pages in PDF File: 32

Keywords: Unconditional expectations, Optimal monetary policy

JEL Classification: E20, E32, F32, F41

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Date posted: March 26, 2008  

Suggested Citation

Damjanovic, Tatiana and Damjanovic, Vladislav and Nolan, Charles, Linear-Quadratic Approximation to Unconditionally Optimal Policy: The Distorted Steady-State (February 2008). CDMA Working Paper No. 0804. Available at SSRN: http://ssrn.com/abstract=1112088 or http://dx.doi.org/10.2139/ssrn.1112088

Contact Information

Tatiana Damjanovic (Contact Author)
University of St. Andrews - School of Economics and Finance ( email )
The Scores, Castlecliff
St. Andrews, Fife KY16 9AL
United Kingdom
HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages.t.damjanovic.shtml
Vladislav Damjanovic
University of Saint Andrews - School of Economics & Management ( email )
Gateway
St. Andrews, Fife KY16 9SS
United Kingdom
Charles Nolan
University of St. Andrews ( email )
College Gate
The Observatory Buchanan Gardens
Saint Andrews, Fife KY16 9SS
United Kingdom
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