Hevia, Constantino; Nicolini, Juan Pablo - In: IMF Economic Review 61 (2013) 1, pp. 22-51
The paper analyzes optimal policy in a simple small open economy model with price setting frictions. In particular, the paper studies the optimal response of the nominal exchange rate following a terms-of-trade shock. The paper departs from the New Keynesian (NK) literature in that it explicitly...