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Viable Stabilising Non-Taylor Monetary Policies for an Open Economy

  • Jacek Krawczyk

    ()

  • Kunhong Kim

    ()

We extend Krawczyk and Kim (Macroecon Dyn 13(1):46–80, 1999 ) and apply a viability approach to a small-open economy where the exchange rate works as an additional monetary policy transmission channel. A continuous-time version of the model presented in Batini and Haldane (In: Monetary policy rules. National Bureau of Economic Research, Cambridge, pp. 157–202, 1999a ) is used. The model comprises the IS equation, a supply curve and the interest parity condition. We modify the third equation to capture an impact of a domestic interest-rate hike on the speedy appreciation of local currency. We calibrate this modified model using available literature results and apply specialised software (VIKAASA) to compute the open-economy viability kernel that is a set of economic states, from which the central bank can control the economy so that it remains within a nominal constraint set. We then analyse the kernel topology and show a few stablising policies that keep the economy within the constraint set. We also discuss the robustness of such polices to shocks and parameter uncertainty and observe that viability-based policies come from models, which do not require explicit weights on the variables of interest of a central bank. We also contend that in general, viability-based policies are less likely to do damage, if the policy-maker is wrong about some aspects of the environment. Copyright Springer Science+Business Media New York 2014

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File URL: http://hdl.handle.net/10.1007/s10614-013-9360-4
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Article provided by Society for Computational Economics in its journal Computational Economics.

Volume (Year): 43 (2014)
Issue (Month): 2 (February)
Pages: 233-268

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Handle: RePEc:kap:compec:v:43:y:2014:i:2:p:233-268
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  1. Deissenberg, Christophe, 1987. "On the minimax Lyapunov stabilization of uncertain economies," Journal of Economic Dynamics and Control, Elsevier, vol. 11(2), pages 229-234, June.
  2. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
  3. Martinet, V. & Doyen, L., 2007. "Sustainability of an economy with an exhaustible resource: A viable control approach," Resource and Energy Economics, Elsevier, vol. 29(1), pages 17-39, January.
  4. Aaron Drew & Rishab Sethi, 2007. "The transmission mechanism of New Zealand monetary policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 70, June.
  5. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
  6. Seppo Honkapohja & Kaushik Mitra, 2006. "Learning Stability in Economies with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 284-309, April.
  7. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, June.
  8. Jacek B. Krawczyk & Kunhong Kim, 2006. "A Viable Solution to a Small Open-Economy Monetary Policy Problem," Computing in Economics and Finance 2006 188, Society for Computational Economics.
  9. Alejandro Justiniano & Bruce Preston, 2009. "Monetary policy and uncertainty in an empirical small open economy model," Working Paper Series WP-09-21, Federal Reserve Bank of Chicago.
  10. Krawczyk, Jacek & Kim, Kunhong, 2009. "Satisficing Solutions To A Monetary Policy Problem," Macroeconomic Dynamics, Cambridge University Press, vol. 13(01), pages 46-80, February.
  11. Jacek Krawczyk & Rishab Sethi, 2007. "Satisficing Solutions for New Zealand Monetary Policy," Reserve Bank of New Zealand Discussion Paper Series DP2007/03, Reserve Bank of New Zealand.
  12. Krawczyk, Jacek B & Pharo, Alastair & Simpson, Mark, 2011. "Approximations to viability kernels for sustainable macroeconomic policies," Working Paper Series 1531, Victoria University of Wellington, School of Economics and Finance.
  13. Hansen, Lars Peter & Sargent, Thomas J. & Turmuhambetova, Gauhar & Williams, Noah, 2006. "Robust control and model misspecification," Journal of Economic Theory, Elsevier, vol. 128(1), pages 45-90, May.
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