Forward Guidance in Small Open Economy

Marine André and Guido Traficante

MPRA Paper from University Library of Munich, Germany

Abstract: We examine forward guidance in a small open economy New Keynesian model. In a setup where forward guidance duration is known with certainty, we show that the elasticity of in ation with respect to the real exchange rate is a key variable in attenuating the forward guidance puzzle. Then we consider a credible forward guidance regime which is adopted stochastically, in normal times or under a liquidity trap. Compared to closed economy, forward guidance turns out to be more expansionary in open economy and the real exchange rate is a key variable driving this result. In particular, the response of output and inflation is amplifi�ed when aggregate supply is negatively related to the real exchange rate.

Keywords: Monetary policy; small open economy; forward guidance. (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2020-12-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon, nep-opm and nep-ore
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https://mpra.ub.uni-muenchen.de/104601/3/MPRA_paper_104601.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:104600

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