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Robustness of Optimal Interest Rate Rules in an Open Economy

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Listed:
  • Li Qin
  • Moïse Sidiropoulos

Abstract

This paper studies optimal interest-rate rules that are robust with respect to exogenous shocks in open economies. When derived from closed economy optimization models, theoretical interest-rate rules tend to be more aggressive than empirical rules. We show that accounting for openness in an economy results in optimal rules that correspond more closely to the rules used in practice: the robustly optimal rules derived in an open-economy model exhibit less inertia and sensitivity to variations in macroeconomic variables.

Suggested Citation

  • Li Qin & Moïse Sidiropoulos, 2016. "Robustness of Optimal Interest Rate Rules in an Open Economy," Bulletin of Applied Economics, Risk Market Journals, vol. 3(1), pages 29-46.
  • Handle: RePEc:rmk:rmkbae:v:3:y:2016:i:1:p:29-46
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    More about this item

    Keywords

    robustness; optimal interest-rate rule; degree of openness;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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