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International Trade Fluctuations and Monetary Policy

Ana Maria Santacreu and Fernando Leibovici ()

No 367, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the role of trade openness for the design of monetary policy. We extend a standard small open economy model of monetary policy to capture cyclical fluctuations of international trade flows, and parameterize it to match key features of the data. We find that accounting for trade fluctuations matters for monetary policy: when the monetary authority follows a Taylor rule, inflation and the output gap are more volatile. Moreover, we find that the volatility of these variables is significantly higher when the central bank follows the optimal policy based on a model that cannot account for international trade fluctuations.

Date: 2016
New Economics Papers: this item is included in nep-cba, nep-cse, nep-dge, nep-int, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:367

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More papers in 2016 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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