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Financial Integration And Cyclicality Of Monetary Policy In Small Open Economies

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  • Yossi Yakhin

    (Dept. of Economics, Ben-Gurion University of the Negev)

Abstract

Should countries follow counter-cyclical or pro-cyclical monetary policies? This paper documents that in contrast to developed economies, developing countries tend to follow pro-cyclical monetary policies. The paper then constructs a New-Keynesian small open economy model with wage rigidity and solves for the optimal monetary policy under di??erent levels of integration in the international financial markets. The model suggests that as economies gain access to the international financial markets the optimal monetary policy shifts from pro-cyclical to counter-cyclical. Also, when economies are denied access to financial markets the optimal policy partially o??set exchange rate movements which may be perceived as “fear of floating”. Results are robust to a wide range of parameter values and utility specifications.

Suggested Citation

  • Yossi Yakhin, 2008. "Financial Integration And Cyclicality Of Monetary Policy In Small Open Economies," Working Papers 0811, Ben-Gurion University of the Negev, Department of Economics.
  • Handle: RePEc:bgu:wpaper:0811
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    Cited by:

    1. Duncan, Roberto, 2014. "Institutional quality, the cyclicality of monetary policy and macroeconomic volatility," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 113-155.
    2. Sean J. Gossel & Nicholas Biekpe, 2013. "The Cyclical Relationships Between South Africa's Net Capital Inflows and Fiscal and Monetary Policies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(2), pages 64-83, March.
    3. César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel, 2016. "Do Good Institutions Promote Countercyclical Macroeconomic Policies?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(5), pages 650-670, October.
    4. César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel., 2010. "Institutions and Cyclical Properties of Macroeconomic Policies in the Global Economy," Documentos de Trabajo 372, Instituto de Economia. Pontificia Universidad Católica de Chile..
    5. Demirel, Ufuk Devrim, 2010. "Macroeconomic stabilization in developing economies: Are optimal policies procyclical?," European Economic Review, Elsevier, vol. 54(3), pages 409-428, April.
    6. Brahima Coulibaly, 2012. "Monetary policy in emerging market economies: what lessons from the global financial crisis?," International Finance Discussion Papers 1042, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    Financial integration; Monetary policy; Wage rigidity; Small open economy.;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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