The source of uncertainty and optimal monetary policy

Daeha Cho and Joonseok Oh

Economics Letters, 2023, vol. 227, issue C

Abstract: We study optimal monetary policy in response to the cost-push uncertainty shock, which is a second-moment shock, in a textbook New Keynesian model. Following a cost-push uncertainty shock, optimal monetary policy faces a trade-off between output gap and inflation stabilization. This is because, even in the absence of first-moment cost-push shocks, cost-push uncertainty generates a time-varying gap between natural output and efficient output. These results contrast with those under a conventional productivity uncertainty shock, which leads to complete stabilization of the output gap and inflation.

Keywords: Uncertainty shocks; Optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E12 E52 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:227:y:2023:i:c:s0165176523001568

DOI: 10.1016/j.econlet.2023.111131

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