Monetary Rules for Small, Open, Emerging Economies

Douglas Laxton, Paolo Pesenti

NBER Working Paper No. 9568
Issued in March 2003
NBER Program(s):   IFM

This paper develops a variant of the IMF's Global Economic Model (GEM) suitable to analyze macroeconomic dynamics in open economies, and uses it to assess the effectiveness of Taylor rules and Inflation-Forecast-Based (IFB) rules in stabilizing variability in output and inflation. Our findings suggest that a simple IFB rule that does not rely upon any direct estimates of the equilibrium real interest rate and places a relatively high weight on the inflation forecast may perform better in small open economies than conventional Taylor rules.

(487 K)

Published: Laxton, Douglas and Paolo Pesenti. "Monetary Rules For Small, Open, Emerging Economies," Journal of Monetary Economics, 2003, v50(5,Jul), 110-1146.

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