TY  - JOUR
AU  - Gali,Jordi
AU  - Monacelli,Tommaso
TI  - Monetary Policy and Exchange Rate Volatility in a Small Open Economy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8905
PY  - 2002
Y2  - April 2002
UR  - http://www.nber.org/papers/w8905
L1  - http://www.nber.org/papers/w8905.pdf
N1  - Author contact info:
Jordi Gali
Centre de Recerca en Economia Internacional (CREI)
Ramon Trias Fargas 25
08005 Barcelona  SPAIN
Tel: 011-34-93-5422754
Fax: 011-34-93-5421860
E-Mail: jgali@crei.cat
M1  - published as 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.
AB  - 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.
ER  -