Working Paper

Rational Expectations Models with Anticipated Shocks and Optimal Policy: A General Solution Method and a New Keynesian Example

Kiel Working Papers, 1507

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.

Authors

Hans-Werner Wohltmann
Roland Winkler