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Alternative Monetary Rules for a Small Open Economy: The Case of Canada


  • Fabio Ghironi

    () (Boston College)


I compare the performance of alternative monetary rules for Canada using an open economy model under incomplete markets. Different rules generate different paths for the markup and the terms of trade. A comparison of welfare levels suggests that flexible inflation targeting, the Bank of Canada's current policy, dominates strict targeting rules≥among which a fixed exchange rate with the U.S. and the Taylor rule. In contrast to other studies, strict targeting rules generate a more stable real economy by stabilizing markup dynamics. Flexible inflation targeting dominates because it yields a positive covariance between consumption and the labor effort, which provides agents with a source of risk diversification.

Suggested Citation

  • Fabio Ghironi, 2000. "Alternative Monetary Rules for a Small Open Economy: The Case of Canada," Boston College Working Papers in Economics 466, Boston College Department of Economics, revised 30 Oct 2000.
  • Handle: RePEc:boc:bocoec:466

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    Cited by:

    1. Monacelli, Tommaso, 2003. "Monetary policy in a low pass-through environment," Working Paper Series 227, European Central Bank.
    2. Leitemo, Kai & Soderstrom, Ulf, 2005. "Simple monetary policy rules and exchange rate uncertainty," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 481-507, April.
    3. Batini, Nicoletta & Harrison, Richard & Millard, Stephen P., 2003. "Monetary policy rules for an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2059-2094, September.
    4. McCallum, Bennett T & Nelson, Edward, 2000. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 74-91, Winter.
    5. Marco Airaudo & Luis-Felipe Zanna, 2004. "Endogenous Fluctuations in Open Economies: the Perils of Taylor Rules Revisited," Econometric Society 2004 Latin American Meetings 80, Econometric Society.
    6. Fabio Ghironi, 2000. "Towards new open economy macroeconometrics," Staff Reports 100, Federal Reserve Bank of New York.
    7. T.C.Y. Kam & G.C. Lim, 2001. "Interest Rate Smoothing and Inflation-Output Variabilityin a Small Open Economy," Department of Economics - Working Papers Series 817, The University of Melbourne.
    8. Giancarlo Corsetti & Keith Kuester & Gernot J. Müller, 2013. "Floats, Pegs and the Transmission of Fiscal Policy," Central Banking, Analysis, and Economic Policies Book Series,in: Luis Felipe Céspedes & Jordi Galí (ed.), Fiscal Policy and Macroeconomic Performance, edition 1, volume 17, chapter 7, pages 235-281 Central Bank of Chile.
    9. Inhwan So, 2017. "Bank Globalization and Monetary Policy Transmission in Small Open Economies," Working Papers 2017-33, Economic Research Institute, Bank of Korea.
    10. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July.
    11. Sergi Bruno S. & Hsing Yu, 2010. "Responses of Monetary Policy to Inflation, the Output Gap, and Real Exchange Rates: The Case of Australia, Canada, and New Zealand," Global Economy Journal, De Gruyter, vol. 10(2), pages 1-11, May.
    12. Fabio Ghironi, 2000. "U.S.-Europe Economic Interdependence and Policy Transmission," Boston College Working Papers in Economics 470, Boston College Department of Economics.
    13. Scott Hendry & Wai-Ming Ho & Kevin Moran, 2003. "Simple Monetary Policy Rules in an Open-Economy, Limited-Participation Model," Staff Working Papers 03-38, Bank of Canada.
    14. Fabio Ghironi, 2000. "Understanding Macroeconomic Interdependence: Do We Really Need to Shut Off the Current Account?," Boston College Working Papers in Economics 465, Boston College Department of Economics, revised 14 Aug 2003.
    15. Born, Benjamin & Juessen, Falko & Müller, Gernot J., 2013. "Exchange rate regimes and fiscal multipliers," Journal of Economic Dynamics and Control, Elsevier, vol. 37(2), pages 446-465.
    16. Luis-Felipe Zanna, 2003. "Interest rate rules and multiple equilibria in the small open economy," International Finance Discussion Papers 785, Board of Governors of the Federal Reserve System (U.S.).
    17. Timothy Kam, 2003. "The Value of Interest-rate Smoothing in a Forward-looking Small Open Economy," Economics Discussion / Working Papers 03-12, The University of Western Australia, Department of Economics.

    More about this item


    Fixed exchange rates; Inflation targeting; Monetary rules; Taylor rule; Welfare;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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