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

CDMA Working Paper No. 0804

32 Pages Posted: 26 Mar 2008  

Tatiana Damjanovic

University of St. Andrews - School of Economics and Finance

Vladislav Damjanovic

University of St. Andrews - School of Management

Charles Nolan

University of St. Andrews

Date Written: February 2008

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.

Keywords: Unconditional expectations, Optimal monetary policy

JEL Classification: E20, E32, F32, F41

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

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 St. Andrews - School of Management ( email )

The Gateway
Gateway
St. Andrews, Fife KY16 9SS
United Kingdom

Charles Nolan

University of St. Andrews ( email )

North St
Saint Andrews, Fife KY16 9AJ
United Kingdom

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