A Quadratic-Cubic Approximation of Optimal Policy

Asymmetries in monetary policy

“…As already discussed, a second-order approximation of the optimal policy can be obtained by minimizing the loss function (10) under constraints (11), ( 12), ( 13) and (14).…”

“…None of the above works has analyzed optimal monetary policy in a non-linear environment like we do. The only exception is the work of Gross and Hansen (2020), who provided a general theory of quadratic-cubic approximations, applying it to a di¤erent version of the New Keynesian model and emphasizing the importance of asymmetries in wage rigidities. Their work and ours have been conducted in an independent way.…”

“…Gross and Hansen (2020) show this equivalence formally 5. Note that with log utility the e¢ cient level of output is given by Y t = A t .…”