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Relative Price Distortion and Optimal Monetary Policy in Open Economies

Author

Listed:
  • Jinill Kim

    (the Federal Reserve System)

  • Andrew T. Levin

    (the Federal Reserve System)

  • Tack Yun

    (the Federal Reserve System)

Abstract

This paper provides a closed-form solution for optimal monetary policy in a two-country model with Calvo-type sticky prices. Initial price dispersion makes it suboptimal to completely stabilize the producer price index, and the optimal policy would entail a price-level targeting. The solution also indicates that the isomorphism of optimal policy rules between closed and open economy breaks down unless the utility function is logarithmic in consumption.

Suggested Citation

  • Jinill Kim & Andrew T. Levin & Tack Yun, 2008. "Relative Price Distortion and Optimal Monetary Policy in Open Economies," Korean Economic Review, Korean Economic Association, vol. 24, pages 5-31.
    • Handle: RePEc:kea:keappr:ker-20080630-24-1-01
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    References listed on IDEAS

    as
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    Cited by:

    1. Levine, Paul & Pearlman, Joseph & Pierse, Richard, 2008. "Linear-quadratic approximation, external habit and targeting rules," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3315-3349, October.

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    More about this item

    Keywords

    Price Dispersion; Relative Price Distortion; Interdependence; Open Economy; Optimal Policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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