Relative Price Distortion and Optimal Monetary Policy in Open Economies

Jinill Kim, Andrew Levin () and Tack Yun
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Tack Yun: the Federal Reserve System

Korean Economic Review, 2008, vol. 24, 5-31

Abstract: This paper provides a closed-form solution for optimal monetary policy in a two-country model with Calvo-type sticky prices. Initial price dispersion makes it suboptimal to completely stabilize the producer price index, and the optimal policy would entail a price-level targeting. The solution also indicates that the isomorphism of optimal policy rules between closed and open economy breaks down unless the utility function is logarithmic in consumption.

Keywords: Price Dispersion; Relative Price Distortion; Interdependence; Open Economy; Optimal Policy (search for similar items in EconPapers)
JEL-codes: E52 F33 F41 F42 (search for similar items in EconPapers)
Date: 2008
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http://keapaper.kea.ne.kr/RePEc/kea/keappr/KER-20080630-24-1-01.pdf (application/pdf)

Related works:
Working Paper: Relative Price Distortion and Optimal Monetary Policy in Open Economies (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:kea:keappr:ker-20080630-24-1-01

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