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The Expenditure Switching Effect, Welfare and Monetary Policy in a Small Open Economy

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  • Alan Sutherland

Abstract

This paper analyses the implications of the 'expenditure switching effect' for the role of the exchange rate in monetary policy in a small open economy. It is shown that, when elasticity of substitution between home and foreign goods is not equal to unity, welfare depends on the variances of producer prices and the terms of trade. Producer-price targeting is compared to consumer-price targeting and a fixed exchange rate. It is found that a fixed exchange rate yields higher welfare than the other regimes only when the elasticity of substitution between home and foreign goods is a very high. ownership.

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Bibliographic Info

Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp022.

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Date of creation: 28 Jan 2005
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Handle: RePEc:iis:dispap:iiisdp022

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Keywords: monetary policy; exchange rates; welfare;

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