Viable Stabilising Non-Taylor Monetary Policies for an Open Economy
AbstractWe 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 InfoArticle provided by Society for Computational Economics in its journal Computational Economics.
Volume (Year): 43 (2014)
Issue (Month): 2 (February)
Viability; Small-open economy; Monetary policy; VIKAASA; 91B64; 91B55; E52 ; C63 ; C88;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- C88 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Other Computer Software
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