Monetary Policy and Open-Economy Uncertainty

Alessandro Flamini ()

No KERP 2006/23, Keele Economics Research Papers from Centre for Economic Research, Keele University

Abstract: This paper focuses on optimal monetary policy in presence of uncertainty of the structural parameters that characterize an open economy. The framework is a Markov jump-linear-quadratic new Keynesian model, where the central bank searches for the optimal policy in a non certainty equivalence environment. Comparing CPI and domestic inflation targeting, this paper shows that the latter implies considerably less variability in the central bank distribution forecast of the economic dynamics. In particular, the variability of the interest rates distribution forecast is much larger with CPI inflation targeting. The paper also shows that domestic inflation targeting is much less sensitive than CPI inflation targeting to interest rate smoothing and cost-push shocks.

Keywords: Inflation Targeting; uncertainty; Markov jump linear quadratic system; non-certainty equivalence; small open-economy; optimal monetary policy; domestic and CPI inflation. (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2006-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.keele.ac.uk/depts/ec/wpapers/kerp0623.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kee:kerpuk:2006/23

Ordering information: This working paper can be ordered from
Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

Access Statistics for this paper

More papers in Keele Economics Research Papers from Centre for Economic Research, Keele University Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom. Contact information at EDIRC.
Bibliographic data for series maintained by Martin E. Diedrich ( this e-mail address is bad, please contact ).