Optimal monetary policy in a small, open economy: a general-equilibrium analysis

Charles Carlstrom () and Timothy S. Fuerst ()

No 9911, Working Paper from Federal Reserve Bank of Cleveland

Abstract: This paper uses a model of a small, open economy to address two monetary policy issues: 1) What restrictions on the policy rule ensure that the central bank does not introduce real indeterminacy into the economy? and 2) What is the optimal long-run rate of inflation? The model's simplicity makes analyzing determinacy issues remarkably transparent. As for long-run inflation rates, a small, open economy takes the foreign nominal interest rate as a given. To the extent that this rate distorts domestic behavior, positive domestic nominal rates (in contrast to Friedman's celebrated optimum quantity of money) play a role.

Keywords: Monetary policy; Inflation (Finance) (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mon
Date: 1999
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Related works:
Chapter: Optimal Monetary Policy in a Small, Open Economy: A General Equilibrium Analysis (2002)
Working Paper: Optimal Monetary Policy in a Small Open Economy: A General Equilibrium Analysis (2000)
Working Paper: Optimal Monetary Policy in a Small Open Economy: a General Equilbirium Analysis (1999)
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