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Foreign Money Shocks and the Welfare Performance of Alternative Monetary Policy Regimes

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  • Ozge Senay
  • Alan Sutherland

Abstract

The welfare properties of monetary policy regimes for a country subject to foreign money shocks are examined in a two-country sticky-price model. Money targeting is found to be welfare superior to a fixed exchange rate when the expenditure switching effect of exchange rate changes is relatively weak, but a fixed rate is superior when the expenditure switching effect is strong. However, price targeting is superior to both these regimes for all values of the expenditure switching effect. A welfare-maximising monetary rule yields lower output and exchange rate volatility than price targeting for a wide range of parameter values. Copyright The editors of the "Scandinavian Journal of Economics" 2007 .

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  • Ozge Senay & Alan Sutherland, 2007. "Foreign Money Shocks and the Welfare Performance of Alternative Monetary Policy Regimes," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(2), pages 245-266, June.
  • Handle: RePEc:bla:scandj:v:109:y:2007:i:2:p:245-266
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    Citations

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    Cited by:

    1. Pang, Ke, 2013. "Financial integration, nominal rigidity, and monetary policy," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 75-90.
    2. 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.
    3. Mathias Hoffmann & Oliver Holtemˆller, 2010. "Transmission of Nominal Exchange Rate Changes to Export Prices and Trade Flows and Implications for Exchange Rate Policy," Scandinavian Journal of Economics, Wiley Blackwell, pages 127-161.
    4. Ozge Senay & Alan Sutherland, 2015. "Local Currency Pricing, Foreign Monetary Shocks and Exchange Rate Policy," Open Economies Review, Springer, pages 633-661.
    5. Ozge Senay & Alan Sutherland, 2015. "Local Currency Pricing, Foreign Monetary Shocks and Exchange Rate Policy," Open Economies Review, Springer, pages 633-661.
    6. Ke Pang & Yao Tang, 2014. "Vertical Trade, Exchange Rate Pass-Through, and the Exchange Rate Regime," Open Economies Review, Springer, pages 477-520.
    7. Mathias Hoffmann & Oliver Holtemˆller, 2010. "Transmission of Nominal Exchange Rate Changes to Export Prices and Trade Flows and Implications for Exchange Rate Policy," Scandinavian Journal of Economics, Wiley Blackwell, pages 127-161.

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