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Alternative Monetary Policy Rules for Small Open Economies

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  • Richard Froyen
  • Alfred Guender

Abstract

This paper examines the relative merits of alternative monetary policy rules for a small open economy. Rules considered target: the exchange rate, price level, nominal income, or a monetary aggregate. The standard framework employed in previous comparisons of these rules fails to take account of important features of small open economies. In particular, the standard framework fails to consider the effects on aggregate supply of exchange rate adjustments resulting from adherence to policy rules. Incorporating these effects is shown to weaken the case for targeting nominal income and, more generally, to complicate the ranking of policy rules.

Suggested Citation

  • Richard Froyen & Alfred Guender, 2000. "Alternative Monetary Policy Rules for Small Open Economies," Review of International Economics, Wiley Blackwell, vol. 8(4), pages 721-740, November.
    • Handle: RePEc:bla:reviec:v:8:y:2000:i:4:p:721-740
    DOI: 10.1111/1467-9396.00253
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    Cited by:

    1. Alfred V. Guender & Sharon McCaw, 2001. "The Role of Openness in the Debate on Rules vs. Discretion: A Simple Exposition," Australian Economic Papers, Wiley Blackwell, vol. 40(1), pages 91-110, March.
    2. Guender, Alfred V., 2008. ""Leaning with the wind"? An open-economy example," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 941-964, September.
    3. Alfred Guender, 2005. "On discretion versus commitment and the role of the direct exchange rate channel in a forward-looking open economy model," International Economic Journal, Taylor & Francis Journals, vol. 19(3), pages 355-377.
    4. Guender, Alfred V. & Tam, Julie, 2004. "On the performance of nominal income targeting as a strategy for monetary policy in a small open economy," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 143-163, March.
    5. Ali, Syed Zahid & Anwar, Sajid, 2011. "Supply-side effects of exchange rates, exchange rate expectations and induced currency depreciation," Economic Modelling, Elsevier, vol. 28(4), pages 1650-1672, July.
    6. Alfred Guender & Yu Xie, 2007. "Is there an exchange rate channel in the forward-looking Phillips curve? A theoretical and empirical investigation," New Zealand Economic Papers, Taylor & Francis Journals, vol. 41(1), pages 5-28.
    7. Guender, Alfred V., 2003. "Optimal discretionary monetary policy in the open economy: Choosing between CPI and domestic inflation as target variables," Bank of Finland Research Discussion Papers 12/2003, Bank of Finland.
    8. Jose A. Lopez & Mark M. Spiegel, 2002. "Financial structure and macroeconomic performance over the short and long run," Pacific Basin Working Paper Series 2002-05, Federal Reserve Bank of San Francisco.

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