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Financial Integration And Cyclicality Of Monetary Policy In Small Open Economies

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  • Yossi Yakhin

    (Dept. of Economics, Ben-Gurion University of the Negev)

Abstract

Should countries follow counter-cyclical or pro-cyclical monetary policies? This paper documents that in contrast to developed economies, developing countries tend to follow pro-cyclical monetary policies. The paper then constructs a New-Keynesian small open economy model with wage rigidity and solves for the optimal monetary policy under di??erent levels of integration in the international financial markets. The model suggests that as economies gain access to the international financial markets the optimal monetary policy shifts from pro-cyclical to counter-cyclical. Also, when economies are denied access to financial markets the optimal policy partially o??set exchange rate movements which may be perceived as “fear of floating”. Results are robust to a wide range of parameter values and utility specifications.

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Bibliographic Info

Paper provided by Ben-Gurion University of the Negev, Department of Economics in its series Working Papers with number 0811.

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Length: 61 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bgu:wpaper:0811

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Keywords: Financial integration; Monetary policy; Wage rigidity; Small open economy.;

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References

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Cited by:
  1. Duncan, Roberto, 2014. "Institutional quality, the cyclicality of monetary policy and macroeconomic volatility," Globalization and Monetary Policy Institute Working Paper 163, Federal Reserve Bank of Dallas.
  2. Brahima Coulibaly, 2012. "Monetary policy in emerging market economies: what lessons from the global financial crisis?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1042, Board of Governors of the Federal Reserve System (U.S.).
  3. César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel, 2012. "Do good institutions promote counter-cyclical macroeconomic policies?," Globalization and Monetary Policy Institute Working Paper 118, Federal Reserve Bank of Dallas.
  4. Demirel, Ufuk Devrim, 2010. "Macroeconomic stabilization in developing economies: Are optimal policies procyclical?," European Economic Review, Elsevier, vol. 54(3), pages 409-428, April.
  5. César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel., 2010. "Institutions and Cyclical Properties of Macroeconomic Policies in the Global Economy," Documentos de Trabajo, Instituto de Economia. Pontificia Universidad Católica de Chile. 372, Instituto de Economia. Pontificia Universidad Católica de Chile..

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