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

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 New Keynesian model with hybrid price setting both under optimal unrestricted and discretionary monetary policy with flexible inflation targeting. If the degree of backward-looking price setting behavior is sufficiently small (large), anticipated cost-push shocks lead in both policy regimes to a higher (lower) volatility in the output gap and in the central bank's loss than an unanticipated shock of the same size. This inversion of the volatility effects of news shocks follows from the inverse relation between the price-setting behavior and the optimal monetary policy. Under a fully microfounded hybrid New Keynesian Phillips curve with price indexation, this inversion of volatility results is not possible since the Phillips curve remains hybrid even in the limit case of full price indexation.

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File URL: https://www.econstor.eu/bitstream/10419/130566/1/857127691.pdf
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Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2016-06.

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Date of creation: 2016
Handle: RePEc:zbw:cauewp:201606
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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. 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.
  4. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
  5. 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).
  6. Leitemo, Kai, 2008. "Inflation-targeting rules: History-dependent or forward-looking?," Economics Letters, Elsevier, vol. 100(2), pages 267-270, August.
  7. Offick, Sven & Wohltmann, Hans-Werner, 2013. "News shocks, nonfundamentalness and volatility," Economics Letters, Elsevier, vol. 119(1), pages 17-19.
  8. 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.
  9. 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.
  10. 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.
  11. Schmitt-Grohé, Stephanie & Uribe, Martín, 2012. "What's News in Business Cycles," CEPR Discussion Papers 8984, C.E.P.R. Discussion Papers.
  12. 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.
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