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Optimal monetary policy for a small open economy

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  • Divino, Jose Angelo

Abstract

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.

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  • Divino, Jose Angelo, 2009. "Optimal monetary policy for a small open economy," Economic Modelling, Elsevier, vol. 26(2), pages 352-358, March.
    • Handle: RePEc:eee:ecmode:v:26:y:2009:i:2:p:352-358
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    Cited by:

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    2. Divino, Jose Angelo & Haraguchi, Carlos, 2022. "Monetary Policy And Reserve Requirements In A Small Open Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 26(4), pages 1073-1106, June.
    3. Mikael Bask, 2014. "A Case For Interest Rate Inertia In Monetary Policy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 19(2), pages 140-159, March.
    4. Marco Riguzzi & Philipp Wegmueller, 2017. "Economic Openness and Fiscal Multipliers," International Economic Journal, Taylor & Francis Journals, vol. 31(1), pages 1-35, January.
    5. Peter Wamalwa, 2018. "Optimal Monetary Policy with Output and Asset Price Volatility in an Open Economy: Evidence from Kenya," Working Papers 734, Economic Research Southern Africa.
    6. Eksi, Ozan, 2015. "Endogenous markups in the new Keynesian model: Implications for inflation–output trade-off and welfare," Economic Modelling, Elsevier, vol. 51(C), pages 626-634.
    7. Dmitry N. Shults & Zarina E. Tsokolaeva, 2022. "О Некоторых Аспектах Оптимизации Денежно-Кредитной Политики," Russian Economic Development (in Russian), Gaidar Institute for Economic Policy, issue 3, pages 9-21, March.
    8. Divino, José Angelo, 2009. "Monetary Policy Rules Across OECD Countries," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 63(1), April.
    9. Dmitry N. Shults & Zarina E. Tsokolaeva, 2022. "Some Aspects of Monetary Policy Optimization [О Некоторых Аспектах Оптимизации Денежно-Кредитной Политики]," Russian Economic Development, Gaidar Institute for Economic Policy, issue 3, pages 9-21, March.
    10. Martínez-García, Enrique, 2021. "Get the lowdown: The international side of the fall in the U.S. natural rate of interest," Economic Modelling, Elsevier, vol. 100(C).
    11. Alba, Joseph D. & Chia, Wai-Mun & Park, Donghyun, 2012. "A Welfare Evaluation of East Asian Monetary Policy Regimes under Foreign Output Shock," ADB Economics Working Paper Series 299, Asian Development Bank.
    12. Jose Angelo Divino, 2006. "Cross-Country Evidence On Monetary Policy Rules," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 178, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    13. Xin, Baogui & Jiang, Kai, 2023. "Central bank digital currency and the effectiveness of negative interest rate policy: A DSGE analysis," Research in International Business and Finance, Elsevier, vol. 64(C).
    14. Jose Angelo Divino, 2018. "What Impact Does Inflation Targeting Have On The Real Economy Of Developing And Emerging Countries?," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 13(03), pages 1-18, September.

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