Extreme Events and Optimal Monetary Policy

Jinill Kim and Francisco Ruge-Murcia

Cahiers de recherche from Centre interuniversitaire de recherche en économie quantitative, CIREQ

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 nonlinearly and asymmetrically to shocks. The trade-off between targeting a gross ináation rate above 1 as insurance against extreme shocks and strict price stability is unambiguously decided in favour of strict price stability.

Keywords: extreme value theory; nonlinear models; skewness risk; monetary policy; third-order perturbation; simulated method of moments (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2016
New Economics Papers: this item is included in nep-cba, nep-ger, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.cireqmontreal.com/wp-content/uploads/cahiers/09-2016-cah.pdf (application/pdf)

Related works:
Journal Article: EXTREME EVENTS AND OPTIMAL MONETARY POLICY (2019)
Working Paper: Extreme events and optimal monetary policy (2018)
Working Paper: Extreme Events and Optimal Monetary Policy (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mtl:montec:09-2016

Access Statistics for this paper

More papers in Cahiers de recherche from Centre interuniversitaire de recherche en économie quantitative, CIREQ Contact information at EDIRC.
Bibliographic data for series maintained by Sharon BREWER (sharon.brewer@umontreal.ca).