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Foreign Money Shocks and the Welfare Performance of Alternative Monetary Policy Regimes

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  • Ozge Senay
  • Alan Sutherland

Abstract

The welfare properties of monetary policy regimes for a country subject to foreign money shocks are examined in a two-country sticky-price model. Money targeting is found to be welfare superior to a fixed exchange rate when the expenditure switching effect of exchange rate changes is relatively weak, but a fixed rate is superior when the expenditure switching effect is strong. However, price targeting is superior to both these regimes for all values of the expenditure switching effect. A welfare-maximising monetary rule yields lower output and exchange rate volatility than price targeting for a wide range of parameter values. Copyright The editors of the "Scandinavian Journal of Economics" 2007 .

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 109 (2007)
Issue (Month): 2 (06)
Pages: 245-266

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Handle: RePEc:bla:scandj:v:109:y:2007:i:2:p:245-266

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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Cited by:
  1. Mathias Hoffmann & Oliver Holtemˆller, 2010. "Transmission of Nominal Exchange Rate Changes to Export Prices and Trade Flows and Implications for Exchange Rate Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(1), pages 127-161, 03.
  2. Ozge Senay & Alan Sutherland, 2010. " Local Currency Pricing, Foreign Monetary Shocks and Exchange Rate Policy," CDMA Working Paper Series 1005, Centre for Dynamic Macroeconomic Analysis.

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