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On Optimal Monetary Policy Rules and the Construction of MCIs in the Open Economy

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  • Alfred Guender

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Abstract

This paper presents a simple open-economy forward-looking model to underscore the important role of the real exchange rate channel in the conduct of optimal monetary policy. As opposed to the closed economy, optimal monetary policy in the open economy depends on both demand-side and supply-side parameters. The paper also highlights the importance of the exchange rate channel for the design and implementation of a Monetary Conditions Index in the conduct of monetary policy. The model gives rise to an alternative MCI where the weight on the real exchange rate depends on all parameters of the model and the policymaker’s preferences. Copyright Springer Science + Business Media, Inc. 2005

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 16 (2005)
Issue (Month): 2 (April)
Pages: 189-207

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Handle: RePEc:kap:openec:v:16:y:2005:i:2:p:189-207

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: open economy; direct exchange rate channel; optimal monetary policy; MCI;

References

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  1. Mayes, David G. & Viren, Matti, 1998. "The Exchange Rate and Monetary Conditions in the Euro Area," Research Discussion Papers 27/1998, Bank of Finland.
  2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  3. Clarida, Richard & Gali, Jordi & Gertler, Mark, 2002. "A simple framework for international monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 879-904, July.
  4. Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
  5. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
  6. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc.
  7. Peeters, Marga, 1999. "Measuring monetary conditions in Europe: Use and limitations of the monetary conditions index," MPRA Paper 23534, University Library of Munich, Germany.
  8. Bennett T. McCallum, 1981. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
  9. Bennett T. McCallum & Edward Nelson, 2000. "Timeless Perspectives vs. Discretionary Monetary Policy In Forward-Looking Models," NBER Working Papers 7915, National Bureau of Economic Research, Inc.
  10. Lars E. O. Svensson, 1997. "Inflation Targeting: Some Extensions," NBER Working Papers 5962, National Bureau of Economic Research, Inc.
  11. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  12. Jordi Galí & Tommaso Monacelli, 2004. "Monetary policy and exchange rate volatility in a small open economy," Economics Working Papers 835, Department of Economics and Business, Universitat Pompeu Fabra.
  13. Jordi Gali & Tommaso Monacelli, 1999. "Optimal Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Boston College Working Papers in Economics 438, Boston College Department of Economics, revised 15 Nov 1999.
  14. Gerlach, Stefan & Smets, Frank, 2000. "MCIs and monetary policy," European Economic Review, Elsevier, vol. 44(9), pages 1677-1700, October.
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Cited by:
  1. Wai Ching Poon, 2010. "Augmented MCi: AN Indicator Of Monetary Policy Stance For ASEAN-5?," Development Research Unit Working Paper Series 25-10, Monash University, Department of Economics.
  2. Wai-Ching Poon, 2010. "A monetary policy rule: The augmented Monetary Conditions Index for Philippines using UECM and bounds tests," Development Research Unit Working Paper Series 04-10, Monash University, Department of Economics.
  3. Pei-Tha Gan, 2014. "The Optimal Economic Uncertainty Index: A Grid Search Application," Computational Economics, Society for Computational Economics, vol. 43(2), pages 159-182, February.
  4. Malik, Hamza, 2005. "Monetary-Exchange Rate Policy and Current Account Dynamics," MPRA Paper 455, University Library of Munich, Germany, revised Sep 2006.
  5. Wai Ching Poon, 2010. "Testing Transmission Mechanisms on Economic Growth in Malaysia," Development Research Unit Working Paper Series 26-10, Monash University, Department of Economics.
  6. Cavoli, Tony, 2008. "The exchange rate and optimal monetary policy rules in open and developing economies: Some simple analytics," Economic Modelling, Elsevier, vol. 25(5), pages 1011-1021, September.

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