In this paper, we consider a small open economy under the New Keynesian model with unemployment of Galí (2011a, b) to discuss the design of the monetary policy. Our findings can be summarized in three parts. First, even with the existence of unemployment, the optimal policy is to minimize...

This paper discusses the design of monetary policy in a New Keynesian small open economy framework by introducing nominal wage rigidities and incomplete exchange rate pass-through on import prices. Three main findings are summarized. First, with the existence of an incomplete exchange rate...