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Viable Stabilising Non-Taylor Monetary Policies for an Open Economy

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  • Jacek Krawczyk

    ()

  • Kunhong Kim

    ()

Abstract

We extend Krawczyk and Kim (Macroecon Dyn 13(1):46–80, 1999 ) and apply a viability approach to a small-open economy where the exchange rate works as an additional monetary policy transmission channel. A continuous-time version of the model presented in Batini and Haldane (In: Monetary policy rules. National Bureau of Economic Research, Cambridge, pp. 157–202, 1999a ) is used. The model comprises the IS equation, a supply curve and the interest parity condition. We modify the third equation to capture an impact of a domestic interest-rate hike on the speedy appreciation of local currency. We calibrate this modified model using available literature results and apply specialised software (VIKAASA) to compute the open-economy viability kernel that is a set of economic states, from which the central bank can control the economy so that it remains within a nominal constraint set. We then analyse the kernel topology and show a few stablising policies that keep the economy within the constraint set. We also discuss the robustness of such polices to shocks and parameter uncertainty and observe that viability-based policies come from models, which do not require explicit weights on the variables of interest of a central bank. We also contend that in general, viability-based policies are less likely to do damage, if the policy-maker is wrong about some aspects of the environment. Copyright Springer Science+Business Media New York 2014

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Bibliographic Info

Article provided by Society for Computational Economics in its journal Computational Economics.

Volume (Year): 43 (2014)
Issue (Month): 2 (February)
Pages: 233-268

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Handle: RePEc:kap:compec:v:43:y:2014:i:2:p:233-268

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Web page: http://www.springerlink.com/link.asp?id=100248
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Keywords: Viability; Small-open economy; Monetary policy; VIKAASA; 91B64; 91B55; E52 ; C63 ; C88;

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References

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  1. Deissenberg, Christophe, 1987. "On the minimax Lyapunov stabilization of uncertain economies," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 11(2), pages 229-234, June.
  2. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
  3. Kaushik Mitra & Seppo Honkapohja, 2004. "Learning Stability in Economies with Heterogenous Agents," Royal Holloway, University of London: Discussion Papers in Economics, Department of Economics, Royal Holloway University of London 04/17, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  4. Alejandro Justiniano & Bruce Preston, 2010. "Monetary policy and uncertainty in an empirical small open-economy model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 25(1), pages 93-128.
  5. Krawczyk, Jacek & Kim, Kunhong, 2009. "Satisficing Solutions To A Monetary Policy Problem," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 13(01), pages 46-80, February.
  6. Krawczyk, Jacek B & Pharo, Alastair & Simpson, Mark, 2011. "Approximations to viability kernels for sustainable macroeconomic policies," Working Paper Series, Victoria University of Wellington, School of Economics and Finance 1531, Victoria University of Wellington, School of Economics and Finance.
  7. Jacek Krawczyk & Rishab Sethi, 2007. "Satisficing Solutions for New Zealand Monetary Policy," Reserve Bank of New Zealand Discussion Paper Series DP2007/03, Reserve Bank of New Zealand.
  8. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, December.
  9. Vincent Martinet & Luc Doyen, 2007. "Sustainability of an economy with an exhaustible resource: A viable control approach," Working Papers 22177, Institut National de la Recherche Agronomique, France.
  10. Aaron Drew & Rishab Sethi, 2007. "The transmission mechanism of New Zealand monetary policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 70, June.
  11. Jacek B. Krawczyk & Kunhong Kim, 2006. "A Viable Solution to a Small Open-Economy Monetary Policy Problem," Computing in Economics and Finance 2006 188, Society for Computational Economics.
  12. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
  13. Hansen, Lars Peter & Sargent, Thomas J. & Turmuhambetova, Gauhar & Williams, Noah, 2006. "Robust control and model misspecification," Journal of Economic Theory, Elsevier, vol. 128(1), pages 45-90, May.
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