Unemployment fluctuations, and optimal monetary policy in a small open economy
AbstractIn this paper, we incorporate key ingredients of a small open economy into the New Keynesian model with unemployment of Gali (2011a,b) to discuss the design of the monetary policy. The main findings regarding the issue of monetary policy design can be summarized as threefold. First, the optimal policy is to seek to minimize variance of domestic price inflation, wage inflation, and the output gap if both domestic price and wage are sticky. Second, stabilizing unemployment rate is important to reduce the welfare loss incurred by both technology and labor supply shocks. Therefore, introducing the unemployment rate as an another argument into the Taylor-rule type interest rate rule will be welfare-enhancing. Last, controlling CPI inflation is the best when the policy is not allowed to respond to unemployment rate.
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Bibliographic InfoPaper provided by University of Windsor, Department of Economics in its series Working Papers with number 1309.
Length: 31 pages
Date of creation: 28 Aug 2013
Date of revision:
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More information through EDIRC
Unemployment; Monetary policy; Small open economy.;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- 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-2013-09-06 (All new papers)
- NEP-CBA-2013-09-06 (Central Banking)
- NEP-MAC-2013-09-06 (Macroeconomics)
- NEP-MON-2013-09-06 (Monetary Economics)
- NEP-OPM-2013-09-06 (Open Economy Macroeconomics)
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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