Policy Rules for Open Economies

Laurence Ball

No 6760, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines the choice of a monetary-policy rule in a simple macroeconomic model. In a closed economy, the optimal policy is a output and inflation. In an open economy, the optimal rule changes in two ways. First, the policy instrument is a Conditions Index the exchange rate. Second, on the right side of the rule, inflation is replaced by filters out the transitory effects of exchange-rate movements. The model also implies that pure inflation targeting is dangerous in an open economy, because it creates large fluctuations in exchange rates and output. Targeting long-run inflation avoids this problem and produces a close approximation to the optimal instrument rule.

Date: 1998-10
Note: ME EFG IFM
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Citations: View citations in EconPapers (153)

Published as Policy Rules for Open Economies , Laurence M. Ball. in Monetary Policy Rules , Taylor. 1999

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Related works:
Chapter: Policy Rules for Open Economies (1999)
Working Paper: Policy Rules for Open Economies (1998)
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