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Policy Rules and External Shocks Author info | Abstract | Publisher info | Download info | Related research | Statistics Laurence Ball
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This essay discusses rules for monetary policy in open economies. If policymakers seek to stabilize output and inflation, optimal rules in open economies differ considerably from optimal rules in closed economies. In open economies, stability is best achieved by targeting long-run inflation, a measure of inflation adjusted to remove transitory effects of exchange-rate movements. Stability is also enhanced by adding an exchange-rate term to "Taylor rules" for setting interest rates. Finally, central banks must choose whether their policy instrument is an interest rate or a "monetary conditions index": an average of the interest rate and the exchange rate. The nature of shocks to the exchange rate determines which of these choices keeps output and inflation more stable.
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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number
82.
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Date of creation: Oct 2000Date of revision:
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References listed on IDEAS 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.: Philip Lowe & Luci Ellis, 1997.
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Other versions: Efrem Castelnuovo, 2004.
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Computing in Economics and Finance 2004
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Other versions:
Efrem Castelnuovo, 2006.
"Regime Shifts and the Stability of Backward Looking Phillips Curves in Open Economies ,"
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MPRA Paper
2318, University Library of Munich, Germany.
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Carlos Fernando Lagrota R. Lopes, 2004.
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Marcel Fratzscher, 2002.
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Other versions: Sek, Siok Kun, 2008.
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MPRA Paper
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Other versions: Adolfson, Malin, 2002.
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"Incomplete Exchange Rate Pass-Through and Simple Monetary Policy Rules ,"
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478, Stockholm School of Economics.
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[Downloadable!] (restricted) Helmut Wagner, 2001.
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Cleomar Gomes da Silva & Luiz Carlos Bresser-Pereira, 2008.
"Inflation Targeting in Brazil: a Keynesian Approach ,"
Textos para discussão
158, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
[Downloadable!]
Guy Debelle & Jenny Wilkinson, 2002.
"Inflation Targeting and the Inflation Process: Some Lessons from an Open Economy ,"
RBA Research Discussion Papers
rdp2002-01, Reserve Bank of Australia.
[Downloadable!]
Ilan GOLDFAJN & Gino OLIVARES, 2001.
"Can Flexible Exchange Rates Still “Work” In Financially Open Economies? ,"
G-24 Discussion Papers
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[Downloadable!]
Marcelo Ochoa & Patricio Valenzuela, 2004.
"Impactos de un Shock Externo en un Modelo Estocástico de Equilibrio General para una Economía Abierta: El Caso de Chile ,"
Macroeconomics
0407007, EconWPA.
[Downloadable!]
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