Monetary Policy, Incomplete Asset Markets, and Welfare in a Small Open Economy

Shigeto Kitano and Kenya Takaku
Additional contact information
Kenya Takaku: Faculty of Business, Aichi Shukutoku University

No DP2014-39, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: We develop a small open economy model with capital, sticky prices, and a simple form of financial frictions. We compare welfare levels under three alternative rules: a domestic inflation-based Taylor rule, a CPI inflation-based Taylor rule, and an exchange rate peg. We show that the superiority of an exchange rate peg over a domestic inflation-based Taylor rule becomes more pronounced under incomplete financial asset markets and more severe financial frictions.

Keywords: Small open economy; DSGE; Welfare comparison; Incomplete financial market; Ramsey policy; Exchange rate regime (search for similar items in EconPapers)
JEL-codes: E42 E44 E52 F31 F41 G15 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2014-12
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-opm
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https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2014-39.pdf First version, 2014 (application/pdf)

Related works:
Journal Article: Monetary policy, incomplete asset markets, and welfare in a small open economy (2015)
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