Extreme Events and Optimal Monetary Policy

Francisco Ruge-Murcia and Jinill Kim

No 605, 2017 Meeting Papers from Society for Economic Dynamics

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 non-linearly and asymmetrically to shocks. The trade-off between targeting a gross inflation rate above $1$ as insurance against extreme shocks, and strict price stability is unambiguously solved in favour of the latter.

Date: 2017
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Working Paper: Extreme Events and Optimal Monetary Policy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:605

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