An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy
Massachusetts Institute of Technology; Princeton University
New Keynesian DSGE model with Calvo staggered price-setting, monopolistic competition, representative household optimization, decision lags for both prices and quantities, and interest-rate feedback rule for monetary policy
Calvo staggered price-setting with fraction 1-alpha adjusting each period; fraction gamma of adjusters post prices immediately, fraction 1-gamma must wait one quarter; Dixit-Stiglitz demand
Table 2 p.331
Constrained-optimal policy minimizing welfare loss L subject to interest rate variance constraint and zero lower bound
Authors identify this as the constrained-optimal policy that balances inflation stabilization with interest rate volatility constraints given the zero lower bound