|
Jordi Gali, Tommaso Monacelli
NBER Working Paper No. 8905*
Issued in April 2002
NBER Program(s): EFG
IFM
ME
---- 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 monetary policy regimes for the small open economy: domestic inflation targeting, CPI targeting 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 suboptimal regimes.
*Published: Gali, Jordi and Tommaso Monacelli. "Monetary Policy And Exchange Rate Volatility In A Small Open Economy," Review of Economic Studies, 2005, v72(252,Jul), 707-734.
Would you like an annual subscription to NBER Working Papers? Click
here for more information.
You may purchase this paper on-line in .pdf format
from SSRN.com ($5) for electronic delivery.
Information for subscribers and others expecting no-cost downloads
Machine-readable bibliographic record -
MARC,
RIS,
BibTeX
| 
