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Monetary Policy Rules for a Small Open Economy

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  • Wolfram Berger

Abstract

In this paper, the optimal choice of a monetary target is investigated for a small open economy that is subject to foreign monetary policy shocks. In contrast to large parts of the literature, pegging the exchange rate is never the best policy choice for the small open economy in our model. Instead, monetary targeting and, depending on the parameter combination, producer price index targeting come closest to the optimal policy rule in terms of welfare. Generally, the welfare performance of the simple targeting rules under consideration hinge critically on the degree of pass-through in the home economy and in the rest of the world. Copyright 2008 The Author Journal compilation 2008 Banca Monte dei Paschi di Siena SpA.

Suggested Citation

  • Wolfram Berger, 2008. "Monetary Policy Rules for a Small Open Economy," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 37(1), pages 1-30, February.
  • Handle: RePEc:bla:ecnote:v:37:y:2008:i:1:p:1-30
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    References listed on IDEAS

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    1. Sutherland, Alan, 2006. "The expenditure switching effect, welfare and monetary policy in a small open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1159-1182, July.
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    30. repec:hrv:faseco:34721962 is not listed on IDEAS
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    Cited by:

    1. Bianca De Paoli, 2009. "Monetary Policy under Alternative Asset Market Structures: The Case of a Small Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(7), pages 1301-1330, October.

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