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The Poole analysis in the new open economy macroeconomic framework

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  • Hoffmann, Mathias
  • Kempa, Bernd

Abstract

This paper evaluates simple, non-optimising monetary policy rules in the tradition of the well-known Poole analysis within a general two-country open-economy model of the New Open Economy Macroeconomic framework. Pure money supply rules are compared with simple interest rate rules for the large and the small open economy. The results for the large economy resemble those of the original Poole analysis. This is also confirmed when considering welfare. In particular, an interest rate rule yields superior results with respect to liquidity shocks whereas a money supply rule is preferable when real shock predominate. In the small open economy scenario the results of the large economy case continue to hold for domestic shocks. For foreign shocks, welfare improves under an interest rate rule relative to a money supply rule when real shocks are considered and the impact on real money balances is neglected. The reverse holds for foreign liquidity shocks. In all scenarios an interest rate rule stabilises domestic consumption. --

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Bibliographic Info

Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 06-08.

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Date of creation: 2006
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Handle: RePEc:zbw:cfrwps:0608

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Keywords: Monetary Policy; Poole Analysis; Exchange Rate Regimes; Welfare;

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  1. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 103-124, April.
  2. Carlstrom, Charles T. & Fuerst, Timothy S., 1995. "Interest rate rules vs. money growth rules a welfare comparison in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(2), pages 247-267, November.
  3. Giancarlo Corsetti & Paolo Pesenti, 1997. "Welfare and Macroeconomic Interdependence," NBER Working Papers 6307, National Bureau of Economic Research, Inc.
  4. Collard, Fabrice & Dellas, Harris, 2005. "Poole in the New Keynesian model," European Economic Review, Elsevier, Elsevier, vol. 49(4), pages 887-907, May.
  5. Michael Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibiity," Working Papers, University of Washington, Department of Economics 0016, University of Washington, Department of Economics.
  6. Don E. Roper & Stephen J. Turnovsky, 1980. "Optimal Exchange Market Intervention in a Simple Stochastic Macro Model," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 13(2), pages 296-309, May.
  7. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  8. Stephanie Schmitt-Grohé & Martín Uribe, 2007. "Optimal simple and implementable monetary and fiscal rules," Working Paper, Federal Reserve Bank of Atlanta 2007-24, Federal Reserve Bank of Atlanta.
  9. Bennett T. McCallum, 1986. "Some Issues Concerning Interest Rate Pegging, Price Level Determinacy, and the Real Bills Doctrine," NBER Working Papers 1294, National Bureau of Economic Research, Inc.
  10. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers, Board of Governors of the Federal Reserve System (U.S.) 2, Board of Governors of the Federal Reserve System (U.S.).
  11. Galí, Jordi, 2002. "New Perspectives on Monetary Policy, Inflation and the Business Cycle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3210, C.E.P.R. Discussion Papers.
  12. Kareken, John H & Muench, Thomas & Wallace, Neil, 1973. "Optimal Open Market Strategy: The Use of Information Variables," American Economic Review, American Economic Association, American Economic Association, vol. 63(1), pages 156-72, March.
  13. Eric Parrado & Andres Velasco, 2002. "Optimal Interest Rate Policy in a Small Open Economy," NBER Working Papers 8721, National Bureau of Economic Research, Inc.
  14. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  15. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
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