@article{c18e8c747448407c9669eb8441f992dc,
title = "EXTREME EVENTS AND OPTIMAL MONETARY POLICY",
abstract = "This article studies the 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 distributions. A nonlinear perturbation solution of the model is estimated by the simulated method of moments. Under the Ramsey policy, the central bank responds nonlinearly and asymmetrically to shocks. The trade-off between targeting a gross inflation rate above 1 as insurance against extreme shocks and targeting an average gross inflation at unity to avoid adjustment costs is unambiguously decided in favor of strict price stability.",
author = "Jinill Kim and Francisco Ruge-Murcia",
note = "Funding Information: 1This article was previously circulated under the title “Extreme Events and the Fed.” The authors benefitted from comments by Luigi Boccola, Marcelle Chauvet, the editor (J. Fern{\'a}ndez-Villaverde), and two anonymous referees. Ruge-Murcia acknowledges the support from the Social Sciences and Humanities Research Council (SSHRC), and from the Bank of Canada through its Fellowship Program. Kim{\textquoteright}s work was supported by a grant from Korea University (K1808651). Please address correspondence to: Francisco Ruge-Murcia, Department of Economics, McGill University, 855 Sherbrooke Street West, Montreal, Quebec H3A 2T7, Canada (CA). Phone: +1 (514) 398 6063. E-mail: francisco.ruge-murcia@mcgill.ca. Publisher Copyright: {\textcopyright} (2018) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association",
year = "2019",
month = may,
doi = "10.1111/iere.12372",
language = "English",
volume = "60",
pages = "939--963",
journal = "International Economic Review",
issn = "0020-6598",
publisher = "Wiley-Blackwell",
number = "2",
}