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Optimal Monetary Policy with Non-Zero Net Foreign Wealth

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  • Mykhaylova, Olena

Abstract

I study the impact of net foreign wealth on the optimal monetary policy of an open economy in a two-country DSGE model with incomplete markets, sticky prices and deviations from the Law of One Price. I find that by optimally manipulating monetary policy, central banks can affect the timing of interest receipts (or payments) and therefore increase the risk-sharing role of the internationally traded asset. In particular, debtor nations find it optimal to allow their currency to float relatively more freely than do creditor nations. In order to maximize consumer welfare, in most specifications of the model central bank should target a weighted average of CPI inflation and changes in the nominal exchange rate.

Suggested Citation

  • Mykhaylova, Olena, 2010. "Optimal Monetary Policy with Non-Zero Net Foreign Wealth," MPRA Paper 23598, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:23598
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    References listed on IDEAS

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    Cited by:

    1. Mykhaylova Olena, 2011. "Welfare Implications of Regional Asymmetries in a Monetary Union," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-43, December.
    2. Mykhaylova, Olena, 2009. "Welfare implications of country size in a monetary union," MPRA Paper 23323, University Library of Munich, Germany.

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    More about this item

    Keywords

    Optimal monetary policy; welfare; open economy; net foreign wealth.;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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