Asset Market Structures and Monetary Policy in a Small Open Economy
AbstractThis paper sets up a canonical new Keynesian small open economy model with nominal price rigidities to explore the impact of habit persistence and exchange rate pass-through on the welfare ranking of alternative monetary policy rules. It identifies three factors that can affect the welfare ranking: the degree of habit persistence, the degree of exchange rate pass-through, and labor supply elasticity. In contrast to the findings of De Paoli (2009a, 2009b), the analysis reveals a reversal in the welfare ranking of alternative monetary policy rules for unitary intertemporal and intratemporal elasticities of substitution, depending on the asset market structures of small open economies with external habit. The paper also finds that exchange rate pegging outperforms domestic producer price index inflation targeting at high degrees of intratemporal elasticity of substitution and external habit, regardless of asset market structures. Finally, the paper finds that exchange rate pegging outperforms domestic or consumer price index inflation targeting if the exchange rate is misaligned.
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Bibliographic InfoPaper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 252.
Length: 35 pages
Date of creation: 28 Oct 2010
Date of revision:
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More information through EDIRC
asset market structures; exchange rate peg; monetary policy rules;
Find related papers by JEL classification:
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-06 (All new papers)
- NEP-CBA-2010-11-06 (Central Banking)
- NEP-MAC-2010-11-06 (Macroeconomics)
- NEP-MON-2010-11-06 (Monetary Economics)
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.:
- Javier García-Cicco & Roberto Pancrazi & Martín Uribe, 2006.
"Real Business Cycles in Emerging Countries?,"
NBER Working Papers
12629, National Bureau of Economic Research, Inc.
- Bianca De Paoli, 2004.
"Monetary Policy and Welfare in a Small Open Economy,"
CEP Discussion Papers
dp0639, Centre for Economic Performance, LSE.
- De Paoli, Bianca, 2009. "Monetary policy and welfare in a small open economy," Journal of International Economics, Elsevier, vol. 77(1), pages 11-22, February.
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