We study optimal monetary and fiscal stabilization policy in a two-country monetary union in the presence of (inefficient) mark-up shocks, price rigidities and monopolistic competition. The underlying dynamic system contains two Phillips curves featuring public spending and mark-up shocks. We...

We study welfare-based monetary policy in a two-country DSGE model characterized by financial frictions. We compare the cooperative Ramsey monetary policy with standard policy benchmarks as well as with the optimal Ramsey policy in a currency area. Our main results are the following. First,...

This paper characterizes welfare in a small open economy and derives the corresponding optimal monetary policy rule. It shows that the utility-based loss function for a small open economy is a quadratic expression in domestic inflation, output gap and real exchange rate. In contrast to previous...

Can the structure of asset markets change the way monetary policy should be conducted? Following a linear-quadratic approach, the present paper addresses this question in a New Keynesian small open economy framework. Our results reveal that the configuration of asset markets significantly...

The EMU accession countries are obliged to fulfill the Maastricht convergence criteria prior to entering the EMU. What should be the optimal monetary policy satisfying these criteria? To answer this question, the paper proposes a DSGE model of a two-sector small open economy. First, I derive the...

The novelty of this article is its theoretical framework, which allows for modeling of an announced change in the type of monetary regime operated. The behavior of a small open economy that has announced the adoption of a monetary policy regime of offsetting nominal exchange rate changes is...

This paper revisits the question of the appropriate domain of a currency area using a New-Keynesian open economy model in which the world is split in two areas, each framed as a continuum of small open regions. We show that the adoption of a common currency like the euro can be beneficial for...

This work presents an extension of a small open economy DSGE model allowing the transition toward a monetary policy regime aimed at exchange rate stability to be described. The model is estimated using the Bayesian technique to fit the properties of the Czech economy. In the scenarios assessed,...

The issue of whether the money supply can serve as a nominal anchor for the domestic price level under real exchange rate targeting is examined. When capital controls are perfect, so that there is complete separation between official and unofficial foreign exchange markets, the domestic...