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Interest Rate Rules and Welfare in Open Economies

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  • Ozge Senay

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Abstract

This paper analyses the welfare performance of a set of five alternative interest rate rules in an open economy stochastic dynamic general equilibrium model with nominal rigidities. A rule with a lagged interest rate term, high feedback on inflation and low feedback on output is found to yield the highest welfare for a small open economy. This result is robust across different degrees of openness, different sources of home and foreign shocks, alternative foreign monetary rules and different specifications for price setting behaviour. The same rule emerges as both the Nash and cooperative equilibria in a two-country version of the model.

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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200715.

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Date of creation: 15 Oct 2007
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Handle: RePEc:san:cdmawp:0715

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Keywords: Welfare; Monetary Policy; Interest Rate Rules; Second Order Approximation.;

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Cited by:
  1. Teo, Wing Leong, 2009. "Can exchange rate rules be better than interest rate rules?," Japan and the World Economy, Elsevier, vol. 21(3), pages 301-311, August.
  2. Mykhaylova, Olena, 2010. "Optimal Monetary Policy with Non-Zero Net Foreign Wealth," MPRA Paper 23598, University Library of Munich, Germany.

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