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Rational expectations models with anticipated shocks and optimal policy: a general solution method and a new Keynesian example

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  • Wohltmann, Hans-Werner
  • Winkler, Roland C.

Abstract

The purpose of this paper is to show how to solve linear dynamic rational expectations models with anticipated shocks by using the generalized Schur decomposition method. Furthermore, we determine the optimal unrestricted and restricted policy responses to anticipated shocks. We demonstrate our solution method by means of a micro-founded hybrid New Keynesian model and show that anticipated cost-push shocks entail higher welfare losses than unanticipated shocks of equal size.

Suggested Citation

  • Wohltmann, Hans-Werner & Winkler, Roland C., 2009. "Rational expectations models with anticipated shocks and optimal policy: a general solution method and a new Keynesian example," Economics Working Papers 2009-01, Christian-Albrechts-University of Kiel, Department of Economics.
    • Handle: RePEc:zbw:cauewp:200901
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    References listed on IDEAS

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    8. Wohltmann, Hans-Werner & Winkler, Roland C., 2008. "On the Non-Optimality of Information: An Analysis of the Welfare Effects of Anticipated Shocks in the New Keynesian Model," Economics Working Papers 2008-21, Christian-Albrechts-University of Kiel, Department of Economics.
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    Cited by:

    1. Paul Beaudry & Franck Portier, 2014. "News-Driven Business Cycles: Insights and Challenges," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 993-1074, December.
    2. Samuel Wills, 2013. "Optimal Monetary Responses to News of an Oil Discovery," OxCarre Working Papers 121, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    3. Offick, Sven & Wohltmann, Hans-Werner, 2016. "Volatility effects of news shocks in New Keynesian models with optimal monetary policy," Economics Letters, Elsevier, vol. 147(C), pages 78-82.
    4. Samuel Wills, 2012. "Optimal Monetary Responses to Oil Discoveries," Discussion Papers 1408, Centre for Macroeconomics (CFM), revised Apr 2014.
    5. Igor Vetlov & Ricardo Mourinho Félix & Laure Frey & Tibor Hlédik & Zoltán Jakab & Niki Papadopoulou & Lukas Reiss & Martin Schneider, 2010. "The Implementation of Scenarios Using DSGE Models," Bank of Lithuania Working Paper Series 8, Bank of Lithuania.
    6. Kapinos, Pavel, 2011. "Forward-looking monetary policy and anticipated shocks to inflation," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 620-633.
    7. Offick, Sven & Wohltmann, Hans-Werner, 2015. "Volatility effects of news shocks in (B)RE models with optimal monetary policy," Economics Working Papers 2015-07, Christian-Albrechts-University of Kiel, Department of Economics.
    8. Sacht, Stephen, 2014. "Optimal monetary policy responses and welfare analysis within the highfrequency New-Keynesian framework," Economics Working Papers 2014-03, Christian-Albrechts-University of Kiel, Department of Economics.

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    More about this item

    Keywords

    Anticipated Shocks; Optimal Monetary Policy; Rational Expectations; Generalized Schur Decomposition; Welfare Effects;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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