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Foreign output shocks, monetary rules and macroeconomic volatilities in small open economies

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  • Alba, Joseph D.
  • Su, Zheng
  • Chia, Wai-Mun

Abstract

The 2008 financial crisis is marked by the drop in output of major industrial countries which affected small open economies in various degrees. We examine the role of three different types of monetary policy rules in mitigating or exacerbating the effects of a negative foreign output shock on key macroeconomic variables of a small open economy by numerically solving a dynamic stochastic general equilibrium (DSGE) model. We find that compared to the Taylor rule, small open economies that follow either fixed exchange rate regime or strict inflation targeting tend to stabilize real exchange rate and inflation at the expense of substantial instability in the real economy.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 20 (2011)
Issue (Month): 1 (January)
Pages: 71-81

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Handle: RePEc:eee:reveco:v:20:y:2011:i:1:p:71-81

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Web page: http://www.elsevier.com/locate/inca/620165

Related research

Keywords: Exchange rate regimes Strict inflation targeting Taylor rule Foreign output shock Output volatility;

References

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Cited by:
  1. Ahmad, A.H. & Pentecost, Eric J., 2012. "Identifying aggregate supply and demand shocks in small open economies: Empirical evidence from African countries," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 272-291.
  2. Ibrahima Sangaré, 2014. "Chocs extérieurs et régimes monétaires en Asie du Sud-Est : une analyse DSGE," Working Papers hal-00949973, HAL.
  3. Alba, Joseph D. & Chia, Wai-Mun & Park, Donghyun, 2012. "A Welfare Evaluation of East Asian Monetary Policy Regimes under Foreign Output Shock," ADB Economics Working Paper Series 299, Asian Development Bank.

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