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The Timeless Perspective vs. Discretion: Theory and Monetary Policy Implications for an Open Economy

Compared to the standard Phillips curve, an open-economy version that features a real exchange rate channel leads to a markedly different target rule in a New Keynesian optimizing framework. Under optimal policy from a timeless perspective (TP) the target rule involves additional history dependence in the form of lagged inflation. The target rule also depends on more parameters, notably the discount factor as well as two IS and two Phillips curve parameters. Stabilization policy in this open economy model is no longer isomorphic to policy in a closed economy. Because of the additional history dependence in an open economy target rule price level targeting is no longer consistent with optimal policy. The gains from commitment are smaller in economies where the real exchange rate channel exerts a direct effect on inflation in the Phillips curve.

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Paper provided by University of Canterbury, Department of Economics and Finance in its series Working Papers in Economics with number 11/19.

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Length: 36 pages
Date of creation: 13 Apr 2011
Date of revision:
Handle: RePEc:cbt:econwp:11/19
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  1. Laurence Ball, 1998. "Policy Rules for Open Economies," RBA Research Discussion Papers rdp9806, Reserve Bank of Australia.
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  8. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
  9. 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.
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  18. 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.
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