IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Welfare-Based Optimal Monetary Policy in a Two-Sector Small Open Economy

  • Yuliya Rychalovska
Registered author(s):

    The paper analyzes the stabilization objectives of optimal monetary policy and the trade-offs facing the central bank in a two-sector small open economy model obtained as a limiting case of a two-country DSGE framework. We introduce a more complicated economic structure, namely, multiple domestic sectors combined with a variety of exogenous shocks. In addition, our model includes a more general specication of consumers’ preferences than has been considered in the literature so far. As a result, we are able to uncover additional welfare effects specic to the open multi-sectoral economy and make a methodological contribution by deriving a utility-based welfare measure and the optimal reaction function of the central bank. We show that the optimal targeting rule is represented by a complex expression that prescribes the response to the appropriate measure of domestic inflation, sectoral output gaps, as well as to the relevant relative prices. We demonstrate that our model generates an endogenous conflict between the objectives of domestic inflation and real exchange rate stabilization in addition to the inflation-output gap policy trade-off common in the literature. Furthermore, we experiment with alternative simple rules and analyze their ability to replicate the optimal solution.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.cnb.cz/en/research/research_publications/cnb_wp/download/cnbwp_2007_16.pdf
    Download Restriction: no

    Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2007/16.

    as
    in new window

    Length:
    Date of creation: Dec 2007
    Date of revision:
    Handle: RePEc:cnb:wpaper:2007/16
    Contact details of provider: Postal: Na Prikope 28, 115 03 Prague 1
    Phone: 00420 2 2442 1111
    Fax: 00420 2 2421 8522
    Web page: http://www.cnb.cz/en/research/research_intro/
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Pierpaolo Benigno & Michael Woodford, 2005. "Inflation Stabilization And Welfare: The Case Of A Distorted Steady State," Journal of the European Economic Association, MIT Press, vol. 3(6), pages 1185-1236, December.
    2. Evi Pappa & Zheng Liu, 2005. "Gains from International Monetary Policy Coordination: Does It Pay to Be Different?," Computing in Economics and Finance 2005 457, Society for Computational Economics.
    3. Alan Sutherland, 2002. "Incomplete Pass-Through and the Welfare Effects of Exchange Rate Variability," Discussion Paper Series, Department of Economics 200212, Department of Economics, University of St. Andrews.
    4. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 743-764.
    5. Corsetti, Giancarlo & Pesenti, Paolo, 2002. "International Dimensions of Optimal Monetary Policy," CEPR Discussion Papers 3349, C.E.P.R. Discussion Papers.
    6. Benigno, Gianluca & Benigno, Pierpaolo, 2006. "Designing targeting rules for international monetary policy cooperation," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 473-506, April.
    7. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, vol. 91(2), pages 248-252, May.
    8. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
    9. Erceg, Christopher & Levin, Andrew, 2006. "Optimal monetary policy with durable consumption goods," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1341-1359, October.
    10. De Paoli, Bianca, 2009. "Monetary policy and welfare in a small open economy," Journal of International Economics, Elsevier, vol. 77(1), pages 11-22, February.
    11. Tibor Hledik, 2003. "Modelling the Second-Round Effects of Supply-Side Shocks on Inflation," Working Papers 2003/12, Czech National Bank, Research Department.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:cnb:wpaper:2007/16. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jan Babecky)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.