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Optimal Taylor Rules in an Estimated Model of a Small Open Economy

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Author Info
Nooman Rebei
Steve Ambler
Ali Dib

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Abstract

We develop a model of a small open economy with three types of nominal rigidities (domestic goods prices, imported goods prices and wages) and eight different structural shocks. We estimate the model's structural parameters using a maximum likelihood procedure and use it to compute welfare-maximizing Taylor rules for setting domestic short-term interest rates. For these computations, we use a second-order approximation around the model's deterministic steady state, which allows the Taylor rule coefficients to affect the means of consumption, leisure and real balances as well as their variances. Welfare gains from moving to the optimal Taylor rule are substantial, but require a very precise knowledge of the values of the model's structural parameters.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 125.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:125

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Keywords: Economic models Open economy Optimal monetary policy Taylor rules

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Find related papers by JEL classification:
F2 - International Economics - - International Factor Movements and International Business
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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References listed on IDEAS
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.:
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Cited by:
(explanations, 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.)

  1. Plasmans J. & Fornero J. & Michalak T., 2006. "A microfounded sectoral model for open economies," Working Papers 2007013, University of Antwerp, Faculty of Applied Economics. [Downloadable!]
    Other versions:
  2. Douch, Mohamed, 2006. "Hybrid Inflation and Price Level Targeting in Small-Open-Economy," MPRA Paper 6173, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Niels Arne Dam & Jesper Gregers Linaa, 2005. "Assessing the Welfare Cost of a Fixed Exchange-Rate Policy," EPRU Working Paper Series 05-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  4. Riccardo Cristadoro & Andrea Gerali & Stefano Neri & Massimiliano Pisani, 2006. "Nominal Rigidities in an Estimated Two Country," Computing in Economics and Finance 2006 162, Society for Computational Economics. [Downloadable!]
  5. Vasco Cúrdia & Daria Finocchiaro, 2007. "Monetary regime change and business cycles," Staff Reports 294, Federal Reserve Bank of New York. [Downloadable!]
  6. Danny Leung, 2008. "Markups in Canada: Have They Changed and Why?," Working Papers 08-8, Bank of Canada. [Downloadable!]
  7. Marcela Meirelles Aurelio, 2005. "Do we really know how inflation targeters set interest rates?," Research Working Paper RWP 05-02, Federal Reserve Bank of Kansas City. [Downloadable!]
  8. Thomas Lubik & Frank Schorfheide, 2005. "A Bayesian Look at New Open Economy Macroeconomics," Economics Working Paper Archive 521, The Johns Hopkins University,Department of Economics. [Downloadable!]
  9. Cúrdia, Vasco & Finocchiaro, Daria, 2005. "An Estimated DSGE Model for Sweden with a Monetary Regime Change," Seminar Papers 740, Stockholm University, Institute for International Economic Studies. [Downloadable!]
  10. Gregory E. Givens, 2006. "Revisiting the Delegation Problem in a Sticky Price and Wage Economy," Working Papers 200601, Middle Tennessee State University, Department of Economics and Finance. [Downloadable!]
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