On Linear Quadratic Approximations

Debortoli, Davide and Nunes, Ricardo (2006): On Linear Quadratic Approximations.

Abstract

We prove the generality of the methodology proposed in Benigno and Woodford (2006). We show that, even in the presence of a distorted steady state, it is always possible and relatively simple to obtain a purely quadratic approximation to the welfare measure. We also show that, in order to do so, the timeless perspective assumption is crucial.

• Item Type: MPRA Paper
• Language: English
• Keywords: Linear-Quadratic Approximation; Distorted Steady State; Timeless Perspective
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C60 - General; E - Macroeconomics and Monetary Economics > E0 - General

References

Altissimo, F., Curdia, V., Rodr´ıguez-Palenzuela, D., 2005. Linear-quadratic approximation to optimal policy: An algorithm and two applications. Manuscript.

Benigno, P., Woodford, M., 2006. Optimal taxation in an RBC model: A linearquadratic approach. Journal of Economic Dynamics and Control. Forthcoming.

Kim, J., Kim, S. H., 2003. Spurious welfare reversal in international business cycle models. Journal of International Economics 60, 471–500.

Marcet, A., Marimon, R., 1998. Recursive contracts. Universitat Pompeu Fabra. Working Paper.

Woodford, M., 2003. Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press.