CDMA Working Paper No. 0804
32 Pages Posted: 26 Mar 2008
Date Written: February 2008
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.
Keywords: Unconditional expectations, Optimal monetary policy
JEL Classification: E20, E32, F32, F41
Suggested Citation: 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: https://ssrn.com/abstract=1112088 or http://dx.doi.org/10.2139/ssrn.1112088