TY  - JOUR
AU  - Ball,Laurence
TI  - Policy Rules and External Shocks
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7910
PY  - 2000
Y2  - September 2000
UR  - http://www.nber.org/papers/w7910
L1  - http://www.nber.org/papers/w7910.pdf
N1  - Author contact info:
Laurence M. Ball
Department of Economics
Johns Hopkins University
Baltimore, MD 21218
Tel: 410/516-7605
Fax: 410/516-7600
E-Mail: lball@jhu.edu
AB  - This essay discusses rules for monetary policy in open economies. If policymakers seek to stabilize output and inflation, optimal rules in open economies differ considerably from optimal rules in closed economies.  In open economies, stability is best achieved by targeting  long-run inflation'   a measure of inflation adjusted to remove transitory effects of exchange-rate movements. Stability is also enhanced by adding an exchange-rate term to "Taylor rules" for setting interest rates.  Finally, central banks must choose whether their policy instrument is an interest rate or a "monetary conditions index": an average of the interest rate and the exchange rate.  The nature of shocks to the exchange rate determines which of these choices keeps output and inflation more stable.
ER  -