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Monetary Policy and Open-Economy Uncertainty

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  • Alessandro Flamini

    ()
    (Keele University, Centre for Economic Research and School of Economic and Management Studies)

Abstract

This paper focuses on optimal monetary policy in presence of uncertainty of the structural parameters that characterize an open economy. The framework is a Markov jump-linear-quadratic new Keynesian model, where the central bank searches for the optimal policy in a non certainty equivalence environment. Comparing CPI and domestic inflation targeting, this paper shows that the latter implies considerably less variability in the central bank distribution forecast of the economic dynamics. In particular, the variability of the interest rates distribution forecast is much larger with CPI inflation targeting. The paper also shows that domestic inflation targeting is much less sensitive than CPI inflation targeting to interest rate smoothing and cost-push shocks.

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Bibliographic Info

Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2006/23.

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Length: 31 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:kee:kerpuk:2006/23

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Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
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Web page: http://www.keele.ac.uk/depts/ec/cer/
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Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

Related research

Keywords: Inflation Targeting; uncertainty; Markov jump linear quadratic system; non-certainty equivalence; small open-economy; optimal monetary policy; domestic and CPI inflation.;

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