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Optimal Monetary Policy With An Interest-Equalization Tax In A Small Open Economy

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Author Info
ARTHUR BENAVIE
RICHARD FROYEN
Abstract

Uncovered interest rate parity (UIP) severely constrains the ability of monetary policy to achieve domestic stabilization goals. In a model which does not include an imported input, control of a wage indexation parameter enhances the effectiveness of monetary policy considerably. Here, wage indexation is shown to be less effective when used with monetary policy in a framework that does include an imported intermediate good. Monetary policy effectiveness is, however, significantly enhanced by incorporating an interest-equalization tax stabilizer into the framework. [E52]

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Article provided by Korean International Economic Association in its journal International Economic Journal.

Volume (Year): 5 (1991)
Issue (Month): 4 (December)
Pages: 1-16
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Handle: RePEc:taf:intecj:v:5:y:1991:i:4:p:1-16

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  1. Aizenman, Joshua & Frenkel, Jacob A, 1985. "Optimal Wage Indexation, Foreign Exchange Intervention, and Monetary Policy," American Economic Review, American Economic Association, vol. 75(3), pages 402-23, June. [Downloadable!] (restricted)
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  2. Turnovsky, Stephen J., 1984. "Exchange market intervention under alternative forms of exogenous disturbances," Journal of International Economics, Elsevier, vol. 17(3-4), pages 279-297, November. [Downloadable!] (restricted)
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  3. Frenkel, Jacob A. & Aizenman, Joshua, 1982. "Aspects of the optimal management of exchange rates," Journal of International Economics, Elsevier, vol. 13(3-4), pages 231-256, November. [Downloadable!] (restricted)
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  4. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
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  5. Dale W. Henderson, 1979. "Financial policies in open economies," International Finance Discussion Papers 133, Board of Governors of the Federal Reserve System (U.S.).
  6. Richard C. Marston & Stephen J. Turnovsky, 1985. "Imported Materials Prices, Wage Policy, and Macroeconomic Stabilization," NBER Working Papers 1254, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Henderson, Dale W, 1979. "Financial Policies in Open Economies," American Economic Review, American Economic Association, vol. 69(2), pages 232-39, May. [Downloadable!] (restricted)
  8. Stephen J. Turnovsky, 1983. "Wage Indexation and Exchange Market Interventions in a Small Open Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 16(4), pages 574-92, November. [Downloadable!] (restricted)
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