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Monetary Stabilization Policy in an Open Economy

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  • Miller, Marcus H

Abstract

This paper investigates optimal stabilization policy in a small open economy using a continuous time model in which inflation depends on future monetary policy as well as past inflation. The impact of monetary policy is assumed to operate via real interest rates and the real exchange rate and the setting of real interest rates is chosen so as to minimize quadratic costs of fluctuations in output and inflation, subject to varying expectations in the foreign exchange market. Analytical expressions and simulation results are presented for \"time inconsistent\" optimal policy, the \"dynamic programming\" solution, for policy which ignores the exchange rate effects when setting real interest rates, and for the \"optimal linear feedback\" rule.
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Suggested Citation

  • Miller, Marcus H, 1985. "Monetary Stabilization Policy in an Open Economy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 32(3), pages 220-233, November.
    • Handle: RePEc:bla:scotjp:v:32:y:1985:i:3:p:220-33
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    Cited by:

    1. Miller, Marcus & Salmon, Mark, 1990. "When does coordination pay?," Journal of Economic Dynamics and Control, Elsevier, vol. 14(3-4), pages 553-569, October.
    2. Chatelain, Jean-Bernard & Ralf Kirsten, 2016. "Countercyclical versus Procyclical Taylor Principles," EconStor Preprints 129796, ZBW - Leibniz Information Centre for Economics.

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