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Monetary policy under alterative asset market structures: the case of a small open economy

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  • Bianca De Paoli

Abstract

Can the structure of asset markets change the way monetary policy should be conducted? Following a linear-quadratic approach, the present paper addresses this question in a New Keynesian small open economy framework. Our results reveal that the configuration of asset markets significantly affects optimal monetary policy and the performance of standard policy rules. In particular, when comparing complete and incomplete markets, the ranking of policy rules is entirely reversed, and so are the policy prescriptions regarding the optimal level of exchange rate volatility.

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File URL: http://eprints.lse.ac.uk/51586/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 51586.

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Length: 33 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:ehl:lserod:51586

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Cited by:
  1. Giovanni Lombardo & Federico Ravenna, 2014. "Openness and Optimal Monetary Policy," Cahiers de recherche 1410, CIRPEE.
  2. Senay, Ozge & Sutherland, Alan, 2010. "The Timing of Asset Trade and Optimal Policy in Dynamic Open Economies," SIRE Discussion Papers 2010-60, Scottish Institute for Research in Economics (SIRE).
  3. Craighead, William D., 2014. "Monetary rules and sectoral unemployment in open economies," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 277-292.
  4. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2010. "Optimal Monetary Policy in Open Economies," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 16, pages 861-933 Elsevier.
  5. Agnès Bénassy-Quéré & Véronique Salins, 2010. "A Case for Intermediate Exchange-Rate Regimes," Working Papers 2010-14, CEPII research center.
  6. Barbara Annicchiarico & Alessandro Piergallini, 2011. "Country‐Specific Risk Premium, Taylor Rules, and Exchange Rates," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 40(1-2), pages 1-27, 02.
  7. Lombardo, Giovanni & Ravenna, Federico, 2014. "Openness and optimal monetary policy," Journal of International Economics, Elsevier, vol. 93(1), pages 153-172.
  8. Dmitriev, Mikhail & Hoddenbagh, Jonathan, 2012. "Price Stability In Small Open Economies," MPRA Paper 46118, University Library of Munich, Germany, revised Feb 2013.
  9. Yongseung Jung, 2010. "Asset Market Structures and Monetary Policy in a Small Open Economy," Working Papers id:3104, eSocialSciences.
  10. Dmitriev, Mikhail & Hoddenbagh, Jonathan, 2012. "The optimal design of a fiscal union," MPRA Paper 46007, University Library of Munich, Germany, revised Apr 2013.
  11. Yongseung Jung, 2010. "Asset Market Structures and Monetary Policy in a Small Open Economy," Macroeconomics Working Papers 22811, East Asian Bureau of Economic Research.

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