Optimal Monetary Policy and Social Insurance in a Small Open Economy

Ruy Lama and Juan Medina

The B.E. Journal of Macroeconomics, 2011, vol. 11, issue 1, 40

Abstract: This paper studies the issue of optimal monetary policy and social insurance in a small open economy model with sticky prices and segmented asset markets. We evaluate whether optimal monetary policy should stabilize inflation to correct distortions associated with price stickiness or if it should provide social insurance (i.e., stabilize consumption) to correct distortions related to segmented asset markets. For an empirically plausible parametrization of these frictions, the optimal monetary policy should focus on stabilizing the inflation rate. This result suggests that providing social insurance with monetary instruments could be highly distortionary in an economy with nominal rigidities.

Keywords: optimal monetary policy; social insurance; asset market segmentation; sticky prices; small open economy (search for similar items in EconPapers)
Date: 2011
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DOI: 10.2202/1935-1690.1978

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