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

Listed author(s):
  • Offick, Sven
  • Wohltmann, Hans-Werner

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S016517651630310X
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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 147 (2016)
Issue (Month): C ()
Pages: 78-82

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Handle: RePEc:eee:ecolet:v:147:y:2016:i:c:p:78-82
DOI: 10.1016/j.econlet.2016.08.018
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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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.
  2. Stephanie Schmitt‐Grohé & Martín Uribe, 2012. "What's News in Business Cycles," Econometrica, Econometric Society, vol. 80(6), pages 2733-2764, November.
  3. Lengnick, Matthias & Wohltmann, Hans-Werner, 2016. "Optimal monetary policy in a new Keynesian model with animal spirits and financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 64(C), pages 148-165.
  4. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
  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. Winkler Roland C. & Wohltmann Hans-Werner, 2011. "News Shocks and Optimal Simple Rules," Review of Economics, De Gruyter, vol. 62(1), pages 1-11, April.
  7. De Grauwe, Paul, 2012. "Booms and busts in economic activity: A behavioral explanation," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 484-501.
  8. Schmitt-Grohé, Stephanie & Uribe, Martín, 2012. "What's News in Business Cycles," CEPR Discussion Papers 8984, C.E.P.R. Discussion Papers.
  9. Offick, Sven & Wohltmann, Hans-Werner, 2016. "Volatility effects of news shocks in New Keynesian models with optimal monetary policy: Updated version," Economics Working Papers 2016-06, Christian-Albrechts-University of Kiel, Department of Economics.
  10. Leitemo, Kai, 2008. "Inflation-targeting rules: History-dependent or forward-looking?," Economics Letters, Elsevier, vol. 100(2), pages 267-270, August.
  11. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
  12. Offick, Sven & Wohltmann, Hans-Werner, 2013. "News shocks, nonfundamentalness and volatility," Economics Letters, Elsevier, vol. 119(1), pages 17-19.
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