Monetary policy and welfare in a small open economy

• 成果类型: Article
• 署名作者: De Paoli, Bianca
• 署名单位: Bank of England; University of London; London School Economics & Political Science; University of London; London School Economics & Political Science
• 刊物名称: JOURNAL OF INTERNATIONAL ECONOMICS
• ISSN/ISSBN: 0022-1996
• DOI: 10.1016/j.jinteco.2008.09.007
• 发表日期: 2009
• 页码: 11-22
• 关键词: Welfare; Loss function; Terms of trade externality; optimal monetary policy; Small open economy

摘要

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. (c) 2008 Elsevier B.V. All rights reserved.