Optimal Monetary Policy in Closed versus Open Economies: An Integrated Approach

Richard Clarida, Jordi Gali, Mark Gertler

NBER Working Paper No. 8604
Issued in November 2001
NBER Program(s):The Economic Fluctuations and Growth Program, The International Finance and Macroeconomics Program, The Monetary Economics Program

This paper develops a new open economy macro model of optimal monetary for a small open economy. Our main result is that in this model, the optimal policy problem for the small open economy is isomorphic to the closed economy case studied in Clarida, Gali, Gertler (1999). In particular, the optimal policy can be implemented with a Taylor Rule under which the domestic interest rate adjusts to the equilibrium real interest rate and expected inflation in domestic prices.

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Document Object Identifier (DOI): 10.3386/w8604

Published: Clarida, Richard, Jordi Gali and Mark Gertler. "Optimal Monetary Policy In Open Versus Closed Economies," American Economic Review, 2001, v91(2,May), 248-252.

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