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Interest Rate Rules And Welfare In Open Economies

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  • Ozge Senay

Abstract

This paper analyses the welfare performance of a set of five alternative interest rate rules in an open economy stochastic dynamic general equilibrium model with nominal rigidities. A rule with a lagged interest rate term, high feedback on inflation and low feedback on output is found to yield the highest welfare for a small open economy. This result is robust across different degrees of openness, different sources of home and foreign shocks, alternative foreign monetary rules and different specifications for price‐setting behaviour. The same rule emerges as both the Nash and cooperative equilibria in a two‐country version of the model.

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  • Ozge Senay, 2008. "Interest Rate Rules And Welfare In Open Economies," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(3), pages 300-329, July.
    • Handle: RePEc:bla:scotjp:v:55:y:2008:i:3:p:300-329
    DOI: 10.1111/j.1467-9485.2008.00455.x
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    References listed on IDEAS

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    Cited by:

    1. Shigeto Kitano & Kenya Takaku, 2016. "External Debt and Taylor Rules in a Small Open Economy," Pacific Economic Review, Wiley Blackwell, vol. 21(5), pages 541-559, December.
    2. James Staveley-O'Carroll & Olena M. Staveley-O'Carroll, 2016. "Exchange Rate Targeting in the Presence of Foreign Debt Obligations," Working Papers 1604, College of the Holy Cross, Department of Economics.
    3. Goyal, Ashima & Verma, Akhilesh K, 2023. "Cross border flows, financial intermediation and interactions of policy rules in a small open economy," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 369-393.
    4. Mykhaylova, Olena, 2010. "Optimal Monetary Policy with Non-Zero Net Foreign Wealth," MPRA Paper 23598, University Library of Munich, Germany.
    5. Staveley-O’Carroll, James & Staveley-O’Carroll, Olena M., 2018. "Exchange rate targeting in the presence of foreign debt obligations," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 113-134.

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