Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130774
Authors: 
Mumtaz, Haroon
Theodoridis, Konstantinos
Year of Publication: 
2015
Series/Report no.: 
Working Paper, School of Economics and Finance, Queen Mary University of London 760
Abstract: 
We use a simple New Keynesian model, with firm specific capital, non-zero steady-state inflation, long-run risks and Epstein-Zin preferences to study the volatility implications of a monetary policy shock. An unexpected increases in the policy rate by 150 basis points causes output and inflation volatility to rise around 10% above their steady-state standard deviations. VAR based empirical results support the model implications that contractionary shocks increase volatility. The volatility effects of the shock are driven by agents' concern about the (in)ability of the monetary authority to reverse deviations from the policy rule and the results are re-enforced by the presence of non-zero trend inflation.
Subjects: 
DSGE
Non-linear SVAR
New Keynesian
Non-zero steady state inflation
Epstein-Zin preferences
Stochastic volatility
JEL: 
E30
E40
E52
C11
C13
C15
C50
Document Type: 
Working Paper

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