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

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  • Offick, Sven
  • Wohltmann, Hans-Werner

Abstract

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.

Suggested Citation

  • Offick, Sven & Wohltmann, Hans-Werner, 2016. "Volatility effects of news shocks in New Keynesian models with optimal monetary policy," Economics Letters, Elsevier, vol. 147(C), pages 78-82.
  • Handle: RePEc:eee:ecolet:v:147:y:2016:i:c:p:78-82 DOI: 10.1016/j.econlet.2016.08.018
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    References listed on IDEAS

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    1. Winkler, Roland C. & Wohltmann, Hans-Werner, 2012. "On the (de)stabilizing effects of news shocks," Economics Letters, Elsevier, vol. 114(3), pages 256-258.
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    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.
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    9. Offick, Sven & Wohltmann, Hans-Werner, 2016. "Volatility effects of news shocks in New Keynesian models with optimal monetary policy," Economics Letters, Elsevier, vol. 147(C), pages 78-82.
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    11. Wohltmann, Hans-Werner & Winkler, Roland C., 2009. "Rational expectations models with anticipated shocks and optimal policy: a general solution method and a New Keynesian example," Kiel Working Papers 1507, Kiel Institute for the World Economy (IfW).
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    1. Offick, Sven & Wohltmann, Hans-Werner, 2016. "Volatility effects of news shocks in New Keynesian models with optimal monetary policy," Economics Letters, Elsevier, vol. 147(C), pages 78-82.

    More about this item

    Keywords

    Anticipated shocks; Optimal monetary policy; Volatility;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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