Cookies?
Library Header Image
LSE Research Online LSE Library Services

Monetary policy and welfare in a small open economy

De Paoli, Bianca (2009) Monetary policy and welfare in a small open economy. Journal of International Economics, 77 (1). pp. 11-22. ISSN 0022-1996

Full text not available from this repository.

Abstract

This paper analyzes optimal monetary policy in a small open economy featuring monopolistic competition and nominal rigidities. It shows that the utility-based loss function for this economy can be written as a quadratic expression of domestic inflation, output gap and real exchange rate. The presence of an internal monopolistic distortion and a terms of trade externality drives optimal policy away from domestic inflation targeting and affects the optimal level of exchange rate volatility. When domestic and foreign goods are close substitutes for each other, the optimal policy rule implies lower real exchange rate volatility than a domestic inflation targeting regime. The reverse is true when the elasticity of substitution between goods is low.

Item Type: Article
Official URL: http://www.sciencedirect.com/science/journal/00221...
Additional Information: © 2009 Elsevier
Library of Congress subject classification: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HJ Public Finance
Sets: Departments > Economics
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 06 Apr 2011 15:09
URL: http://eprints.lse.ac.uk/30266/

Actions (login required)

Record administration - authorised staff only Record administration - authorised staff only