Monetary policy and noise traders: A welfare analysis

Jong Shin and Chetan Subramanian

Journal of Macroeconomics, 2016, vol. 49, issue C, 33-45

Abstract: This paper studies the choice of monetary policy regime in a small open economy with noise traders in forex markets. We focus on two simple rules: fixed exchange rates and inflation targeting. We contrast the above two rules against optimal policy with commitment under productivity shocks. In general, the presence of noise traders increases the desirability of a fixed exchange rate regime. We also evaluate the welfare impact of Tobin taxes in this milieu. These taxes help unambiguously in the absence of productivity shocks; their welfare impact under productivity shocks depends on the monetary regime in place and trade elasticity between domestic and foreign goods.

Keywords: Noise traders; Fixed exchange rates; Tobin taxes; Optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E42 E52 F41 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:49:y:2016:i:c:p:33-45

DOI: 10.1016/j.jmacro.2016.05.002

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