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

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Listed author(s):
  • Bianca De Paoli

Abstract

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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File URL: http://cep.lse.ac.uk/pubs/download/dp0923.pdf
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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
Handle: RePEc:cep:cepdps:dp0923
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

Keywords: Welfare; Optimal Monetary Policy; Asset Markets; Small Open Economy;

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Find related papers by JEL classification:
  • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
  • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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