Non-Traded Goods and Monetary Policy Trade-Offs in a Small Open Economy
AbstractIn this paper I develop a small open economy model that is characterized by existence of two domestic sectors. Together with a home traded goods sector we incorporate a non-traded goods sector. In both sectors prices are sticky, and each one is subject to a specific productivity shock. In this setup the flexible price allocation can not be reached by means of a single monetary policy instrument. Therefore, the central bank faces a trade-off between stabilizing inflation in the Nontraded sector and in the home goods sector. In this context, and when the share of non-traded goods is not too high, a simple Taylor rule outperforms a strict inflation-targeting regime. However, both policy rules are dominated by a rule that moves aggressively the interest rate in response to deviation in core inflation. On the other hand, if the share of non-traded goods is high then the model converges to the closed economy case, and, in absence of an exogenous cost push shock, the optimal policy is to completely stabilize consumer price inflation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 214.
Date of creation: Jun 2003
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-MAC-2003-07-10 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000.
"Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?,"
NBER Working Papers
7869, National Bureau of Economic Research, Inc.
- V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
- Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 533-63, July.
- V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 223, Federal Reserve Bank of Minneapolis.
- V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 277, Federal Reserve Bank of Minneapolis.
- Svensson, Lars E O, 1998.
"Open-Economy Inflation Targeting,"
CEPR Discussion Papers
1989, C.E.P.R. Discussion Papers.
- Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
- Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
- Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
- Yuliya Rychalovska, 2008. "The Implications of Structural Asymmetries for Monetary Policy and Welfare in a Small Open Economy: A Linear Quadratic Framework," CERGE-EI Working Papers wp380, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
- Marcos Antonio Coutinho da Silveira, 2006. "Two-Country New Keynesian DSGE Model: A Small Open Economy as a Limit Case," Discussion Papers 1157, Instituto de Pesquisa Econômica Aplicada - IPEA.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda).
If references are entirely missing, you can add them using this form.