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Rational Expectations Models with Anticipated Shocks and Optimal Policy

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  • Winkler, Roland
  • Wohltmann, Hans-Werner

Abstract

This paper investigates optimal policy in the presence of anticipated (or news) shocks. We determine the optimal unrestricted and restricted policy response in a general rational expectations model and show that, if shocks are news shocks, the optimal unrestricted control rule under commitment contains a forward-looking element. As an example, we lay out a micro-founded hybrid New Keynesian model and show i) that anticipated cost-push shocks entail higher welfare losses than unanticipated shocks of equal size and ii) that the inclusion of forward-looking elements enhances distinctly the performance of simple optimized interest rate rules. --

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century with number 62030.

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Date of creation: 2012
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Handle: RePEc:zbw:vfsc12:62030

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Web page: http://www.socialpolitik.org/
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  1. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  2. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2008. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," Levine's Working Paper Archive 122247000000002352, David K. Levine.
  3. Currie,David & Levine,Paul, 1993. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521441964, November.
  4. Beaudry, Paul & Portier, Franck, 2003. "Stock Prices, News and Economic Fluctuations," CEPR Discussion Papers 3844, C.E.P.R. Discussion Papers.
  5. Fève, Patrick & Matheron, Julien & Sahuc, Jean-Guillaume, 2009. "On the dynamic implications of news shocks," Economics Letters, Elsevier, vol. 102(2), pages 96-98, February.
  6. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
  7. Stephanie Schmitt-Grohe & Martin Uribe, 2008. "What's News in Business Cycles," NBER Working Papers 14215, National Bureau of Economic Research, Inc.
  8. Miguel Casares, 2007. "Monetary Policy Rules in a New Keynesian Euro Area Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 875-900, 06.
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