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Monetary Policy Under Alterative Asset Market Structures: the Case of a Small Open Economy

  • Bianca De Paoli

Can the structure of asset markets change the way monetary policy should be conducted? Following a linear-quadratic approach, the present paper addresses this question in a New Keynesian small open economy framework. Our results reveal that the configuration of asset markets significantly affects optimal monetary policy and the performance of standard policy rules. In particular, when comparing complete and incomplete markets, the ranking of policy rules is entirely reversed, and so are the policy prescriptions regarding the optimal level of exchange rate volatility.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0923.

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Date of creation: Apr 2009
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Handle: RePEc:cep:cepdps:dp0923
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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