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Monetary Policy and Exchange Rate Regime: Proposal for a Small and Less Developed Economy

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We investigate monetary policy under the assumption that a country’s capital market is “open” under the WTO framework while the exchange rate is fixed. Our purpose is to determine if it is possible in this case for the economy to maintain an effective monetary policy for stabilizing the domestic economy. For this, we suggest two institutional restrictions. Given the restrictions, we demonstrate within a macro-dynamic model that monetary policy can still be effective. The implication of such an institutional design for an exchange rate regime is also discussed with special reference to small and less development economies.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp199.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 199.

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Length: 25
Date of creation: 01 Jul 2007
Date of revision:
Handle: RePEc:uts:rpaper:199

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Keywords: open economy trilemma; macroeconomic stability; exchange rate regime;

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  1. Lane, P, 1999. "The New Open Economy Macroeconomics: A Survey," Trinity Economics Papers 993, Trinity College Dublin, Department of Economics.
  2. Beyer, Andreas & Farmer, Roger E. A. & Henry, Jérôme & Marcellino, Massimiliano, 2005. "Factor analysis in a New-Keynesian model," Working Paper Series 0510, European Central Bank.
  3. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  4. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-60, June.
  5. Mankiw, N. Gregory & Reis, Ricardo, 2007. "Sticky Information in General Equilibrium," Scholarly Articles 3415323, Harvard University Department of Economics.
  6. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  7. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  8. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
  9. Carl Chiarella & Peter Flaschel & G. Gong & Willi Semmler, 2002. "Nonlinear Phillips Curves, Complex Dynamics and Monetary Policy in a Keynesian Macro Model," Working Paper Series 120, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
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