The source of uncertainty and optimal monetary policy

Cho, Daeha and Oh, Joonseok (2023) The source of uncertainty and optimal monetary policy. Economics Letters, 227, [111131]. (doi:10.1016/j.econlet.2023.111131).

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Abstract

We study optimal monetary policy in response to the cost-push uncertainty shock, which is a second-moment shock, in a textbook New Keynesian model. Following a cost-push uncertainty shock, optimal monetary policy faces a trade-off between output gap and inflation stabilization. This is because, even in the absence of first-moment cost-push shocks, cost-push uncertainty generates a time-varying gap between natural output and efficient output. These results contrast with those under a conventional productivity uncertainty shock, which leads to complete stabilization of the output gap and inflation.

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Accepted/In Press date: 20 April 2023

e-pub ahead of print date: 25 April 2023

Published date: 5 May 2023

Additional Information: Funding Information: We particularly benefited from the detailed comments of the editor Eric Young, an associate editor, and an anonymous referee. We are grateful to Mira Kim, Yeonu Oh, and Evi Pappa for many insightful discussions. All remaining errors are our own. This work was supported by the research fund of Hanyang University, South Korea ( HY-202300000001166 ). Publisher Copyright: © 2023 Elsevier B.V.

Keywords: Optimal monetary policy, Uncertainty shocks