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Alternative Monetary Rules for a Small Open Economy: The Case of Canada

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  • Fabio Ghironi

    ()
    (Boston College)

Abstract

I compare the performance of alternative monetary rules for Canada using an open economy model under incomplete markets. Different rules generate different paths for the markup and the terms of trade. A comparison of welfare levels suggests that flexible inflation targeting, the Bank of CanadaÃs current policy, dominates strict targeting rules≥among which a fixed exchange rate with the U.S.≥and the Taylor rule. In contrast to other studies, strict targeting rules generate a more stable real economy by stabilizing markup dynamics. Flexible inflation targeting dominates because it yields a positive covariance between consumption and the labor effort, which provides agents with a source of risk diversification.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 466.

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Length: 43 pages
Date of creation: 04 Feb 2000
Date of revision: 30 Oct 2000
Handle: RePEc:boc:bocoec:466

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Keywords: Fixed exchange rates; Inflation targeting; Monetary rules; Taylor rule; Welfare;

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