Calibrating the Equilibrium Condition of a New Keynesian Model with Uncertainty

Abstract

Abstract: This paper presents a theoretical analysis of the simulated impact of uncertainty in a New Keynesian model. In order to incorporate uncertainty, the basic three-equation framework is modified by higher-order approximation resulting in a non-linear (dynamic) IS curve. Using impulse response analyses to examine the behavior of the model after a cost shock, I find interest rates in the version with uncertainty to be lower in contrast to the case under certainty.