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Extreme Events and Optimal Monetary Policy

Author

Listed:
  • Francisco Ruge-Murcia

    (McGill University)

  • Jinill Kim

    (Korea University)

Abstract

This paper studies the positive and normative implication of extreme shocks for monetary policy. The analysis is based on a small-scale New Keynesian model with sticky prices and wages where shocks are drawn from asymmetric generalized extreme value (GEV) distributions. A nonlinear perturbation of the model is estimated by the simulated method of moments. Under both the Taylor and Ramsey policies, the central bank responds non-linearly and asymmetrically to shocks. The trade-off between targeting a gross inflation rate above $1$ as insurance against extreme shocks, and strict price stability is unambiguously solved in favour of the latter.

Suggested Citation

  • Francisco Ruge-Murcia & Jinill Kim, 2017. "Extreme Events and Optimal Monetary Policy," 2017 Meeting Papers 605, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:605
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    References listed on IDEAS

    as
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    Cited by:

    1. Mineyama, Tomohide, 2022. "Revisiting the optimal inflation rate with downward nominal wage rigidity: The role of heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    2. Alessandro Cantelmo, 2022. "Rare Disasters, the Natural Interest Rate and Monetary Policy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(3), pages 473-496, June.
    3. Rufus Adebayo AJISAFE & Kazeem FASOYE & Musbau Olaniyan FATAI & Folorunsho M. AJIDE, 2022. "Optimal Fiscal and Monetary Policy Under Uncertainty in Nigeria: A Markov-Switching Dynamic Approach," Romanian Journal of Economics, Institute of National Economy, vol. 55(2(64)), pages 113-128, December.
    4. Jean‐François Rouillard, 2023. "Credit Crunch and Downward Nominal Wage Rigidities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(4), pages 889-914, June.

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    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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