Arbeitspapier
Linear-quadratic approximation, external habit and targeting rules
We examine the linear-quadratic (LQ) approximation of non-linear stochastic dynamic optimization problems in macroeconomics, in particular for monetary policy. We make four main contributions: first, we draw attention to a general Hamiltonian framework for LQ approximation due to Magill (1977). We show that the procedure for the ‘large distortions’ case of Benigno and Woodford (2003, 2005) is equivalent to the Hamiltonian approach, but the latter is far easier to implement. Second, we apply the Hamiltonian approach to a Dynamic Stochastic General Equilibrium model with external habit in consumption. Third, we introduce the concept of target-implementability which fits in with the general notion of targeting rules proposed by Svensson (2003, 2005). We derive sufficient conditions for the LQ approximation to have this property in the vicinity of a zero-inflation steady state. Finally, we extend the Hamiltonian approach to a non-cooperative equilibrium in a two-country model.
- Sprache
-
Englisch
- Erschienen in
-
Series: ECB Working Paper ; No. 759
- Klassifikation
-
Wirtschaft
Monetary Policy
Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications
Central Banks and Their Policies
- Thema
-
dynamic stochastic general equilibrium models
Linear-quadratic approximation
utility-based loss function
Makroökonomik
Mathematische Optimierung
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Levine, Paul
Pearlman, Joseph G.
Pierse, Richard
- Ereignis
-
Veröffentlichung
- (wer)
-
European Central Bank (ECB)
- (wo)
-
Frankfurt a. M.
- (wann)
-
2007
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:44 MEZ
Datenpartner
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Objekttyp
- Arbeitspapier
Beteiligte
- Levine, Paul
- Pearlman, Joseph G.
- Pierse, Richard
- European Central Bank (ECB)
Entstanden
- 2007
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