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Optimal Taylor Rules in an Estimated Model of a Small Open Economy

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Listed:
  • Nooman Rebei
  • Steve Ambler
  • Ali Dib

Abstract

We develop a model of a small open economy with three types of nominal rigidities (domestic goods prices, imported goods prices and wages) and eight different structural shocks. We estimate the model's structural parameters using a maximum likelihood procedure and use it to compute welfare-maximizing Taylor rules for setting domestic short-term interest rates. For these computations, we use a second-order approximation around the model's deterministic steady state, which allows the Taylor rule coefficients to affect the means of consumption, leisure and real balances as well as their variances. Welfare gains from moving to the optimal Taylor rule are substantial, but require a very precise knowledge of the values of the model's structural parameters.

Suggested Citation

  • Nooman Rebei & Steve Ambler & Ali Dib, 2004. "Optimal Taylor Rules in an Estimated Model of a Small Open Economy," Computing in Economics and Finance 2004 125, Society for Computational Economics.
    • Handle: RePEc:sce:scecf4:125
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    More about this item

    Keywords

    Economic models; Open economy; Optimal monetary policy; Taylor rules;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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