DMCA
Monetary Policy and Exchange Rate Volatility in a Small Open Economy (2003)
Cached
Download Links
| Citations: | 349 - 8 self |
BibTeX
@MISC{Galí03monetarypolicy,
author = {Jordi Galí and Tommaso Monacelli},
title = {Monetary Policy and Exchange Rate Volatility in a Small Open Economy},
year = {2003}
}
Share
 |
 |
 |
 |
||
OpenURL
Abstract
We lay out a small open economy version of the Calvo sticky price model, and show how the equilibrium dynamics can be reduced to a tractable canonical system in domestic inflation and the output gap. We employ this framework to analyze the macroeconomic implications of three alternative rule-based policy regimes for the small open economy: domestic inflation and CPI-based Taylor rules, and an exchange rate peg. We show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail. We also discuss a special case for which domestic inflation targeting constitutes the optimal policy, and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with those suboptimal rules.
Keyphrases
small open economy exchange rate volatility monetary policy domestic inflation relative amount simple second order approximation representative consumer equilibrium dynamic optimal policy key difference suboptimal rule calvo sticky price model welfare loss alternative rule-based policy regime small open economy version exchange rate peg tractable canonical system cpi-based taylor rule output gap special case macroeconomic implication
