Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212412 
Year of Publication: 
2018
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 4/2018
Publisher: 
Bank of Finland, Helsinki
Abstract: 
This paper studies the 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 distributions. A nonlinear perturbation solution of the model is estimated by the simulated method of moments. Under the Ramsey policy, the central bank responds nonlinearly and asymmetrically to shocks. The trade-off between targeting a gross inflation rate above 1 (or a net inflation rate above 0) as insurance against extreme shocks and targeting an average gross inflation at unity to avoid adjustment costs is unambiguously decided in favour of strict price stability.
JEL: 
E4
E5
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-212-9
Document Type: 
Working Paper

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