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Is Monetary Policy in an Open Economy Fundamentally Different?

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  • Monacelli, Tommaso
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    Abstract

    Openness per se requires optimal monetary policy to deviate from the canonical closed-economy principle of domestic price stability, even if domestic prices are the only ones to be sticky. I review this argument using a simple partial equilibrium analysis in an economy that trades in final consumption goods. I then extend the standard open economy New Keynesian model to include imported inputs of production. Production openness strengthens even further the incentive for the policymaker to deviate from strict domestic price stability. With both consumption and production openness variations in the world price of food and in the world price of imported oil act as exogenous cost-push factors.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9087.

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    Date of creation: Aug 2012
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    Handle: RePEc:cpr:ceprdp:9087

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    Related research

    Keywords: consumption imports; exchange rate; imported inputs; monetary policy; openness; trade;

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    Cited by:
    1. Luis Cat�o & Roberto Chang, 2013. "Monetary Rules for Commodity Traders," IMF Economic Review, Palgrave Macmillan, vol. 61(1), pages 52-91, April.
    2. Dmitriev, Mikhail & Hoddenbagh, Jonathan, 2012. "Price Stability In Small Open Economies," MPRA Paper 46118, University Library of Munich, Germany, revised Feb 2013.

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