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Optimal Monetary Policy and Uncertainty Shocks

Deaha Cho, Yoonshin Han, Joonseok Oh and Anna Rogantini Picco

No 61, Dynare Working Papers from CEPREMAP

Abstract: We study optimal monetary policy in response to uncertainty shocks in standard New Keynesian models under Calvo and Rotemberg pricing schemes. We find that optimal monetary policy achieves joint stabilization of inflation and the output gap in both pricing schemes. We show that a simple Taylor rule that puts high weight on inflation stability approximates optimal monetary policy well. This rule mutes firms’ precautionary pricing incentive, the key channel that makes responses under Calvo and Rotemberg pricing schemes differ under the empirically calibrated Taylor rule.

Keywords: Optimal monetary policy; Uncertainty shocks (search for similar items in EconPapers)
JEL-codes: E12 E52 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2020-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ore
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