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Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles

Robert Kollmann ()

No 3279, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper computes welfare maximizing Taylor-style interest rate rules, in a business cycle model of a small open economy. The model assumes staggered price setting and shocks to domestic productivity, to the world interest rate, to world inflation and to the uncovered interest rate parity condition. Optimized policy rules have a pronounced anti-inflation stance and entail significant nominal and real exchange rate volatility. The country responds to an increase in external volatility by holding more foreign assets. The policy rule affects the variance and the mean of consumption. The effect on the mean matters significantly for welfare.

Keywords: business cycles; interest rate rules; Open economy (search for similar items in EconPapers)
JEL-codes: E40 F30 F40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ifn and nep-mac
Date: 2002-03
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Journal Article: Monetary policy rules in the open economy: effects on welfare and business cycles (2002) Downloads
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