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The source of uncertainty and optimal monetary policy

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Listed:
  • Cho, Daeha
  • Oh, Joonseok

Abstract

We study optimal monetary policy in response to the cost-push uncertainty shock, which is a second-moment shock, in a textbook New Keynesian model. Following a cost-push uncertainty shock, optimal monetary policy faces a trade-off between output gap and inflation stabilization. This is because, even in the absence of first-moment cost-push shocks, cost-push uncertainty generates a time-varying gap between natural output and efficient output. These results contrast with those under a conventional productivity uncertainty shock, which leads to complete stabilization of the output gap and inflation.

Suggested Citation

  • Cho, Daeha & Oh, Joonseok, 2023. "The source of uncertainty and optimal monetary policy," Economics Letters, Elsevier, vol. 227(C).
    • Handle: RePEc:eee:ecolet:v:227:y:2023:i:c:s0165176523001568
    DOI: 10.1016/j.econlet.2023.111131
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    Keywords

    Uncertainty shocks; Optimal monetary policy;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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