Stabilising Properties of Discretionary Monetary Policies in a Small Open Economy

Economic Journal, 2006, vol. 116, issue 508, pages 309-326

Abstract: This article sets out a simple New Keynesian open-economy model and shows that the conduct of discretionary monetary policy in an open economy differs substantially from the closed-economy framework. The article shows analytically that the existence of the direct exchange rate channel in the open economy Phillips Curve impairs the perfect stabilising property of monetary policy in the face of demand-side disturbances under domestic inflation targeting. If CPI inflation is instead the target, then the perfect stabilising property of monetary policy breaks down even in the absence of the direct exchange rate channel in the Phillips Curve. Copyright 2006 Royal Economic Society.

Date: 2006
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