The Desirable Smooth Operator, Incomplete Pass Through And The "Zero Bound"
AbstractThe typical New-Keynesian small-open-economy model has qualitative features and monetary-policy prescriptions similar to their original closed-economy counterparts - i.e. complete stablization of domestic inflation is sufficient for optimal policy. We consider a version of the model here where that isomorphism no longer holds and where the zero-interest-rate lower bound matters. Under the commitment benchmark, the optimal interest-rate rule is intrinsically intertial. Under time-consistent policy, it is still optimal to delegate policy to an interest-rate smoothing central banker despite the fact that complete stablization od domestic inflation is no longer possible. We thus extend the analysis of Woodford (1999) to a nontrivial small open economy setting. Our result is robust to alternative degrees of pass through, the types of shocks impinging the natural rate, and minor departures from optimal pricing behaviour.
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 Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2006-03.
Length: 28 pages
Date of creation: Jan 2006
Date of revision:
Contact details of provider:
Postal: Crawford Building, Lennox Crossing, Building #132, Canberra ACT 0200
Phone: +61 2 6125 4705
Fax: +61 2 6125 5448
Web page: http://cama.crawford.anu.edu.au
More information through EDIRC
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- 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
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.:
- Lim, G. C. & McNelis, Paul D., 2004. "Learning and the monetary policy strategy of the European Central Bank," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 997-1010.
- Dennis, Richard & Söderström, Ulf, 2002.
"How Important Is Precommitment for Monetary Policy?,"
Working Paper Series
139, Sveriges Riksbank (Central Bank of Sweden).
- Dennis, Richard & Soderstrom, Ulf, 2006. "How Important Is Precommitment for Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 847-872, June.
- Richard Dennis & Ulf Soderstrom, 2002. "How important is precommitment for monetary policy?," Working Paper Series 2002-10, Federal Reserve Bank of San Francisco.
- Ulf Soderstrom & Richard Dennis, 2003. "How Important is Precommitment for Monetary Policy?," Computing in Economics and Finance 2003 49, Society for Computational Economics.
- Marco A. Espinosa-Vega & Alessandro Rebucci, 2004.
"Retail Bank Interest Rate Pass-through: Is Chile Atypical?,"
Central Banking, Analysis, and Economic Policies Book Series,
in: Luis Antonio Ahumada & J. Rodrigo Fuentes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking Market Structure and Monetary Policy, edition 1, volume 7, chapter 5, pages 147-182
Central Bank of Chile.
- Alessandro Rebucci & Marco A Espinosa-Vega, 2003. "Retail Bank Interest Rate Pass-Through: Is Chile Atypical?," IMF Working Papers 03/112, International Monetary Fund.
- Marco A. Espinosa-Vega & Alessandro Rebucci, 2003. "Retail Bank Interest Rate Pass-Through: Is Chile Atypical?," Working Papers Central Bank of Chile 221, Central Bank of Chile.
- Tommaso Monacelli, 2003.
"Monetary Policy in a Low Pass-Through Environment,"
228, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- Amato, Jeffery D. & Laubach, Thomas, 2003.
"Rule-of-thumb behaviour and monetary policy,"
European Economic Review,
Elsevier, vol. 47(5), pages 791-831, October.
- Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, vol. 91(2), pages 248-252, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Cama Admin).
If references are entirely missing, you can add them using this form.