Optimal monetary policy for a small open economy
This paper focuses on the design of monetary policy rules for a small open economy. The model features optimizing behavior, general equilibrium and price stickiness. The real exchange rate is shown to affect the firm's real marginal cost, aggregate supply and aggregate demand. The welfare objective depends on the openness of the economy, and the optimal policy rule differs from that which obtains in a closed economy. The inflation versus output gap stabilization trade-off is caused by the real exchange rate. The implied optimal monetary policy regime is domestic inflation target coupled with controlled floating of the real exchange rate.
Year of publication: |
2009
|
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Authors: | Divino, Jose Angelo |
Published in: |
Economic Modelling. - Elsevier, ISSN 0264-9993. - Vol. 26.2009, 2, p. 352-358
|
Publisher: |
Elsevier |
Keywords: | Open economy Monetary policy Interest rate rule Stabilization trade-off Exchange rate |
Saved in:
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