Second-order approximation to the Rotemberg model around a distorted steady state
Social welfare objectives are investigated when changing prices is costly (Rotemberg, 1982). A quadratic welfare function is derived, with a distorted steady state, implying inflation and output stabilization goals. Economic distortions influence inflation aversion in a way that differs from Calvo models.
Pre-print version issued as working paper in April 2010 by St Andrews University. Final version published by Elsevier; available online at http://www.sciencedirect.com/
Vol. 110, Issue 2, pp. 132 - 135