We construct an optimizing-agent model of a closed economy which is simple enough that we can use it to make exact utility calculations. There is a stabilization problem because there are one-period nominal contracts for wages, or prices, or both and shocks that are unknown at the time when...

In this paper, I examine the welfare consequences of conventional approximation methods in business cycle analysis: the log-linear approximation of model dynamics and the second-order approximation of social welfare. In a canonical New Keynesian model, the approximation around the deterministic...