Is Monetary Policy in an Open Economy Fundamentally Different?
AbstractOpenness 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 InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9087.
Date of creation: Aug 2012
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Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-08-23 (All new papers)
- NEP-MAC-2012-08-23 (Macroeconomics)
- NEP-MON-2012-08-23 (Monetary Economics)
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- Dmitriev, Mikhail & Hoddenbagh, Jonathan, 2012.
"Price Stability In Small Open Economies,"
46132, University Library of Munich, Germany, revised Feb 2013.
- Luis Catão & Roberto Chang, 2012.
"Monetary Rules for Commodity Traders,"
NBER Working Papers
18536, National Bureau of Economic Research, Inc.
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