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The Timeless Perspective vs. Discretion: Theory and Monetary Policy Implications for an Open Economy

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Abstract

Compared to the standard Phillips curve, an open-economy version that features a real exchange rate channel leads to a markedly different target rule in a New Keynesian optimizing framework. Under optimal policy from a timeless perspective (TP) the target rule involves additional history dependence in the form of lagged inflation. The target rule also depends on more parameters, notably the discount factor as well as two IS and two Phillips curve parameters. Stabilization policy in this open economy model is no longer isomorphic to policy in a closed economy. Because of the additional history dependence in an open economy target rule price level targeting is no longer consistent with optimal policy. The gains from commitment are smaller in economies where the real exchange rate channel exerts a direct effect on inflation in the Phillips curve.

Suggested Citation

  • Alfred Guender, 2011. "The Timeless Perspective vs. Discretion: Theory and Monetary Policy Implications for an Open Economy," Working Papers in Economics 11/19, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:11/19
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    Cited by:

    1. Karagiannides, Gabriel, 2018. "Exploring the Determinacy Dynamics in an Open Economy," MPRA Paper 89268, University Library of Munich, Germany.
    2. Lahcen, BOUNADER, 2016. "Optimal Monetary Policy in Behavioral New Keynesian Model," MPRA Paper 74743, University Library of Munich, Germany.
    3. Malikane, Christopher, 2012. "The Microfoundations of the Keynesian Wage-Price Spiral," MPRA Paper 42923, University Library of Munich, Germany, revised 2012.

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    More about this item

    Keywords

    CPI Inflation Targeting; UIP Puzzle; Instrument Rule; Target Rule; Optimal Monetary Policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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