EXTREME EVENTS AND OPTIMAL MONETARY POLICY

Jinill Kim, Francisco Ruge-Murcia

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish
Pages (from-to)939-963
Number of pages25
JournalInternational Economic Review
Volume60
Issue number2
DOIs
Publication statusPublished - 2019 May

ASJC Scopus subject areas

  • Economics and Econometrics

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