Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
957174 | Journal of Economic Theory | 2012 | 42 Pages |
Abstract
We consider a general class of nonlinear optimal policy problems with forward-looking constraints, and show how to derive a problem with linear constraints and a quadratic objective that approximates the exact problem. The solution to the LQ approximate problem represents a local linear approximation to optimal policy from the “timeless perspective” proposed in Benigno and Woodford (2004, 2005) [6,7], in the case of small enough stochastic disturbances. We also derive the second-order conditions for the LQ problem to have a solution, and show how to correctly rank alternative simple policy rules, again in the case of small enough shocks.
Related Topics
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Authors
Pierpaolo Benigno, Michael Woodford,