Unemployment, Trade Openness and Optimal Monetary Policy

Jianhua Feng (), Chan Wang, Liyuan Wu () and Dingsheng Zhang
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Jianhua Feng: China Economics and Management Academy, Central University of Finance and Economics
Liyuan Wu: Guanghua School of Management and LMEQF, Peking University

Annals of Economics and Finance, 2021, vol. 22, issue 1, 231-253

Abstract: This paper studies how the monetary policymaker should conduct the monetary policy in a small open economy with labor market frictions.The welfare loss function shows that the monetary policymaker faces a stabilization trade-off between the PPI inflation and the unemployment rate gap. We find that the welfare gains from implementing the optimal monetary policy are small relative to the optimized simple rule. In addition, when conducting the optimized simple rule, the monetary policymaker should attach a greater weight to the unemployment rate gap when the economy is more open.

Keywords: Labor market frictions; Small open economy; Optimal monetary policy; Optimized simple policy rule (search for similar items in EconPapers)
JEL-codes: E24 E52 F16 F41 (search for similar items in EconPapers)
Date: 2021
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