Openness, Inflation and Output Under Alternative Monetary Policies: A Structuralist Approach

Rilina Basu, Nandini Das and Ranjanendra Narayan Nag

Foreign Trade Review, 2019, vol. 54, issue 2, 75-90

Abstract: This article theoretically revisits the issue of how trade openness and inflation are interconnected in the light of conduct and optimal design of monetary policy. Central banks in open economies all over the world face a problematic dilemma when it comes to providing a nominal anchor to the economy in the sense that they have to choose between monetary targeting and inflation targeting. The experience has been varied worldwide with respect to these alternative policies in containing inflation. Different dimensions of openness like fully flexible exchange rate and capital mobility have also had significant impacts on the outcomes of policy changes. In this paper, we have constructed two theoretical open macro-economy models using the AD-AS framework under regressive expectations. The first model considers interest-rate targeting incorporating Taylor rule, whereas the second one deals with monetary targeting. The models show that alternate monetary policy rules do not change the basic results of different macroeconomic policies, although the underlying transmission mechanisms are quite different. JEL Codes: E12, E31, E43, E52, F41

Keywords: Inflation; interest rate; monetary policy; openness; macroeconomy (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:sae:fortra:v:54:y:2019:i:2:p:75-90

DOI: 10.1177/0015732519831802

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