Foreign Money Shocks and the Welfare Performance of Alternative Monetary Policy Regimes

Ozge Senay () and Alan Sutherland ()

Scandinavian Journal of Economics, 2007, vol. 109, issue 2, pages 245-266

Abstract: The welfare properties of monetary policy regimes for a country subject to foreign money shocks are examined in a two-country sticky-price model. Money targeting is found to be welfare superior to a fixed exchange rate when the expenditure switching effect of exchange rate changes is relatively weak, but a fixed rate is superior when the expenditure switching effect is strong. However, price targeting is superior to both these regimes for all values of the expenditure switching effect. A welfare-maximising monetary rule yields lower output and exchange rate volatility than price targeting for a wide range of parameter values. Copyright The editors of the "Scandinavian Journal of Economics" 2007 .

Date: 2007

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