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On Optimal Monetary Policy Rules and the Construction of MCIs in the Open Economy

  • Alfred Guender

    ()

This paper presents a simple open-economy forward-looking model to underscore the important role of the real exchange rate channel in the conduct of optimal monetary policy. As opposed to the closed economy, optimal monetary policy in the open economy depends on both demand-side and supply-side parameters. The paper also highlights the importance of the exchange rate channel for the design and implementation of a Monetary Conditions Index in the conduct of monetary policy. The model gives rise to an alternative MCI where the weight on the real exchange rate depends on all parameters of the model and the policymaker’s preferences. Copyright Springer Science + Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s11079-005-5875-1
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 16 (2005)
Issue (Month): 2 (April)
Pages: 189-207

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Handle: RePEc:kap:openec:v:16:y:2005:i:2:p:189-207
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100323

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  1. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  2. David Mayes & Matti Virén, 2000. "The exchange rate and monetary conditions in the Euro area," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(2), pages 199-231, June.
  3. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc.
  4. Bennett T. McCallum & Edward Nelson, 2000. "Timeless Perspectives vs. Discretionary Monetary Policy In Forward-Looking Models," NBER Working Papers 7915, National Bureau of Economic Research, Inc.
  5. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
  6. Lars E. O. Svensson, 1997. "Inflation Targeting: Some Extensions," NBER Working Papers 5962, National Bureau of Economic Research, Inc.
  7. Clarida, Richard & Gali, Jordi & Gertler, Mark, 2002. "A simple framework for international monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 879-904, July.
  8. Bennett T. McCallum, 1981. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
  9. Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
  10. Gerlach, Stefan & Smets, Frank, 2000. "MCIs and monetary policy," European Economic Review, Elsevier, vol. 44(9), pages 1677-1700, October.
  11. Mark Toma, 2001. "Monetary policy," Chapters, in: The Elgar Companion to Public Choice, chapter 21 Edward Elgar.
  12. Jordi Gali & Tommaso Monacelli, 1999. "Optimal Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Boston College Working Papers in Economics 438, Boston College Department of Economics, revised 15 Nov 1999.
  13. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  14. Galí, Jordi & Monacelli, Tommaso, 2002. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," CEPR Discussion Papers 3346, C.E.P.R. Discussion Papers.
  15. Peeters, Marga, 1999. "Measuring monetary conditions in Europe: Use and limitations of the monetary conditions index," MPRA Paper 23534, University Library of Munich, Germany.
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