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Fat-Tailed Shocks and the Central Bank Reaction

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  • Ortiz, Marco

    (Banco Central de Reserva del Perú
    London School of Economics)

Abstract

In this paper we extend the model of Kato and Nishiyama (2005) by introducing fat-tailed shocks in a simple new Keynesian framework where the central bank explicitly considers the zero lower-bound constraint on interest rates. We find that shocks with `excess kurtosis' make monetary policy relatively more aggressive far away from the zero lower bound region though, this difference reverts as the economy gets closer to the constrained region. From a quantitative point of view, our findings suggest that variance-preserving shifts in kurtosis, in the shape of Laplace distributed shocks, do not produce significant effects on the optimal reaction of the central bank.

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Bibliographic Info

Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2014-002.

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Date of creation: Feb 2014
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Handle: RePEc:rbp:wpaper:2014-002

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  1. Athanasios Orphanides & David W. Wilcox, 1996. "The opportunistic approach to disinflation," Finance and Economics Discussion Series 96-24, Board of Governors of the Federal Reserve System (U.S.).
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  3. Mauricio Calani C. & Kevin Cowan L. & Pablo García S., 2010. "Inflation Targeting in Financially Stable Economies: Has it been Flexible Enough?," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 13(2), pages 11-50, August.
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  14. Randall S. Kroszner, 2007. "The Conquest of Worldwide Inflation: Currency Competition and Its Implications for Interest Rates and the Yield Curve," Cato Journal, Cato Journal, Cato Institute, vol. 27(2), pages 135-147, Spring/Su.
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