Insulating policies for large and small countries

W. Michael Cox and Douglas McTaggart

No 8408, Working Papers from Federal Reserve Bank of Dallas

Abstract: In this paper we investigate policies for the large and small country that provide complete insulation from foreign real and monetary disturbances. We find that when there exists two channels of transmission, the integrated commodity and capital markets, using only exchange rate policies does not provide complete insulation. However, floating the exchange rate and pursuing a specific interest rate target does. In terms of output variability however, insulating policies may be undesirable.

Date: 1984
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