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Linear-quadratic approximation of optimal policy problems

Pierpaolo Benigno and Michael Woodford ()

Journal of Economic Theory, 2012, vol. 147, issue 1, 1-42

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.

Keywords: Perturbation methods; Timeless perspective; Policy rules (search for similar items in EconPapers)
JEL-codes: C61 C63 E61 (search for similar items in EconPapers)
Date: 2012
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Related works:
Working Paper: Linear-Quadratic Approximation of Optimal Policy Problems (2006) Downloads
Working Paper: Linear-Quadratic Approximation of Optimal Policy Problems (2006) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:147:y:2012:i:1:p:1-42

DOI: 10.1016/j.jet.2011.10.012

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