Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/130566 
Year of Publication: 
2016
Series/Report no.: 
Economics Working Paper No. 2016-06
Publisher: 
Kiel University, Department of Economics, Kiel
Abstract: 
This paper studies the volatility implications of anticipated cost-push shocks (i.e. news shocks) in a New Keynesian model with hybrid price setting both under optimal unrestricted and discretionary monetary policy with flexible inflation targeting. If the degree of backward-looking price setting behavior is sufficiently small (large), anticipated cost-push shocks lead in both policy regimes to a higher (lower) volatility in the output gap and in the central bank's loss than an unanticipated shock of the same size. This inversion of the volatility effects of news shocks follows from the inverse relation between the price-setting behavior and the optimal monetary policy. Under a fully microfounded hybrid New Keynesian Phillips curve with price indexation, this inversion of volatility results is not possible since the Phillips curve remains hybrid even in the limit case of full price indexation.
Subjects: 
Anticipated shocks
Optimal monetary policy
Volatility
JEL: 
E32
E52
Document Type: 
Working Paper

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