Volatility effects of news shocks in New Keynesian models with optimal monetary policy

This paper studies the volatility implications of anticipated cost-push shocks (i.e. news shocks) in a hybrid New Keynesian model both under optimal unrestricted and discretionary monetary policy. In both regimes, the volatility of the output gap and the central bank’s loss are increasing with the anticipation horizon under sufficiently flexible inflation targeting. By contrast, under nearly strict inflation targeting, an anticipated cost-push shock leads to a smaller central bank’s loss than an unanticipated shock of the same size if additionally the Phillips curve is sufficiently backward-looking.