A Two Sector Small Open Economy Model. Which Inflation to Target?
AbstractThis paper analyses welfare-improving monetary policy reaction functions in the context of a new-Keynesian small open economy model with a tradables and a non-tradables sector. The model is estimated for the case of Canada and used to evaluate the welfare gains of alternative specifications of the feedback nominal interest rate rule, in particular when allowing for different coefficients on the sectorial inflation rates. We find reasonable estimates for the deep parameters of the model , which include significant heterogeneity in the degree of price rigidity across sectors, as well as reasonable quantitative responses to sectorial and aggregate variables to local and foreign shocks. We find welfare gains in responding somehow more aggressively to aggregate inflation deviations from target than it has been the case in the last three decades and substantial welfare losses if the Bank of Canada aimed at stabilizing output more aggressively. But we find substantial further welfare gains of being more aggressive on imported inflation than on domestic sectors inflation since it is imports prices those that show a higher level of estimated stickiness
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 298.
Date of creation: 11 Nov 2005
Date of revision:
Find related papers by JEL classification:
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Cambell Leith & Simon Wren-Lewis, 2006.
" The Optimal Monetary Policy Response to Exchange Rate Misalignments,"
CDMA Conference Paper Series
0605, Centre for Dynamic Macroeconomic Analysis.
- Simon Wren-Lewis & Campbell Leith, 2007. "The Optimal Monetary Policy Response to Exchange Rate Misalignments," Economics Series Working Papers 305, University of Oxford, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.