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Monetary policy and learning in an open economy

Author

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  • Martin Ellison

    (University of Warwick & CEPR)

  • Lucio Sarno

    (Warwick Business School & CEPR)

  • Jouko Vilmunen

    (Bank of Finland)

Abstract

In this paper, we examine the incentives for central bank activism and caution in a two-country open-economy model with uncertainty and learning. We find that the presence of a strategic interaction between the home and foreign central banks creates an additional motivation for caution in monetary policy. An activist policy designed to help the learning of the home central bank is suboptimal since it generates a strong reaction from the foreign central bank. As joint learning by the home and foreign central banks is shown to be detrimental to welfare, the optimal policy is cautious.

Suggested Citation

  • Martin Ellison & Lucio Sarno & Jouko Vilmunen, 2004. "Monetary policy and learning in an open economy," Macroeconomics 0404022, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0404022
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    Cited by:

    1. repec:zbw:bofrdp:2004_017 is not listed on IDEAS
    2. Mikko Puhakka, 2005. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Macroeconomics 0508033, University Library of Munich, Germany.
    3. Jokivuolle, Esa & Lanne, Markku, 2004. "Trading Nokia : the roles of the Helsinki vs the New York stock exchanges," Research Discussion Papers 26/2004, Bank of Finland.
    4. repec:zbw:bofrdp:2004_029 is not listed on IDEAS
    5. Mälkönen, Ville, 2004. "The efficiency implications of financial conglomeration," Research Discussion Papers 17/2004, Bank of Finland.
    6. Suvanto, Antti & Hukkinen, Juhana, 2004. "Stable price level and changing prices," Bank of Finland Research Discussion Papers 28/2004, Bank of Finland.
    7. Leitemo, Kai & Söderström, Ulf, 2008. "Robust Monetary Policy In The New Keynesian Framework," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S1), pages 126-135, April.
    8. Heinz‐Peter Spahn, 2007. "Exchange Rate Stabilisation, Learning And The Taylor Principle," Australian Economic Papers, Wiley Blackwell, vol. 46(2), pages 136-151, June.
    9. Hyytinen, Ari & Takalo, Tuomas, 2004. "Multihoming in the Market for Payment Media: Evidence from Young Finnish Consumers," Discussion Papers 893, The Research Institute of the Finnish Economy.
    10. repec:zbw:bofrdp:2004_026 is not listed on IDEAS
    11. Puhakka, Mikko, 2004. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Research Discussion Papers 29/2004, Bank of Finland.
    12. repec:zbw:bofrdp:2004_028 is not listed on IDEAS
    13. Leitemo, Kai & Söderström, Ulf, 2008. "Robust Monetary Policy In The New Keynesian Framework," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S1), pages 126-135, April.
    14. repec:zbw:bofrdp:2004_031 is not listed on IDEAS
    15. repec:zbw:bofrdp:2004_025 is not listed on IDEAS
    16. Suvanto, Antti & Hukkinen, Juhana, 2004. "Stable price level and changing prices," Research Discussion Papers 28/2004, Bank of Finland.

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    More about this item

    Keywords

    activism; learning; monetary policy; open economy;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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