Extreme Events and Optimal Monetary Policy
Université de Montréal
New Keynesian model with sticky prices and wages, where shock innovations follow a generalized extreme value (GEV) distribution to capture fat tails and asymmetry in productivity and monetary policy shocks
intermediate firms: monopolistic competition with Calvo pricing; final firms: perfect competition
Figure 8
Ramsey optimal policy with GEV distributed shocks (extreme events)
Peak of unconditional welfare function shown in Figure 8, main result of the paper