Optimal Monetary Policy in an Open Economy under Asset Market Segmentation
AbstractThis paper studies optimal monetary policy in a small open economy under flexible prices. The paper's key innovation is to analyze this question in the context of environments where only a fraction of agents participate in asset market transactions (i.e., asset markets are segmented). �In this environment, we study three rules: the optimal state contingent monetary policy; the optimal non-state contingent money growth rule; and the optimal non-state contingent devaluation rate rule. �We compare welfare and the volatility of macro aggegates like consumption, exchange rate, and money under the different rules. �One of our key findings is that amongst non-state contingent rules, policies targeting the exchange rate are, in general, welfare dominated by policies which target monetary aggregates. �Crucially, we find that fixed exchange rates are almost never optimal. �On the other hand, under some conditions, a non-state contingent rule like a fixed money rule can even implement the first-best allocation.
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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 35649.
Date of creation: 13 Nov 2012
Date of revision:
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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
More information through EDIRC
Optimal Monetary Policy; Asset Market Segmentation;
Find related papers by JEL classification:
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
- F - International Economics
- F30 - International Economics - - International Finance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-24 (All new papers)
- NEP-CBA-2012-11-24 (Central Banking)
- NEP-DGE-2012-11-24 (Dynamic General Equilibrium)
- NEP-MAC-2012-11-24 (Macroeconomics)
- NEP-MON-2012-11-24 (Monetary Economics)
- NEP-OPM-2012-11-24 (Open Economy Macroeconomics)
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