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, 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.

Date: 2007
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https://doi.org/10.1111/j.1467-9442.2007.00490.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:scandj:v:109:y:2007:i:2:p:245-266

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