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

Tatiana Damjanovic, Vladislav Damjanovic, Charles Nolan

    Research output: Working paper


    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
    Original languageEnglish
    Number of pages28
    Publication statusPublished - Feb 2008

    Publication series

    NameCentre for Dynamic Macroeconomic Analysis, Working Paper


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