Relative Price Distortion and Optimal Monetary Policy in Open Economies

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Relative Price Distortion and Optimal Monetary Policy in Open Economies

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Jinill Kim (Federal Reserve Board)
Andrew Levin (Federal Reserve Board)
Tack Yun (Federal Reserve Board)

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Abstract

This paper addresses three issues on the conduct of monetary policy in open economies on the basis of a two-country model with Calvo-type sticky prices. Is the isomorphism of the optimal policy problems between closed and open economies robust to whether the foreign country is buffeted by cost-push shocks? How can we obtain a linear quadratic approximation that replicates the key results of the original optimal policy problem, especially when there is an analytical solution to the original problem in the presence of initial price dispersion? What are optimal policy recommendations for the central banks in open economies when both cost-push shock and initial price dispersion exist?

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 211.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:211

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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-2006-07-15 (All new papers)
NEP-CBA-2006-07-15 (Central Banking)
NEP-FDG-2006-07-15 (Financial Development & Growth)
NEP-MAC-2006-07-15 (Macroeconomics)
NEP-MON-2006-07-15 (Monetary Economics)

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