IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/220.html
   My bibliography  Save this paper

On Optimal Stabilization Policy and Nominal Income Targets in an Open Economy

Author

Listed:
  • Alogoskoufis, George

Abstract

This paper considers optimal stabilization policy and nominal income targets for an open economy where the authorities are concerned both with unemployment and monetary instability. To fully achieve these two objectives the authorities must use both monetary and "supply-side" fiscal policy. It is shown that there is an optimal assignment of monetary policy to the monetary stability objective, and supply-side fiscal policy to the unemployment objective. In a second-best world, where only monetary policy can be used in the short run, there is an optimal exchange rate rule, which balances the welfare cost of unemployment against that of monetary instability. This rule prescribes appreciations of the exchange rate following domestic supply shocks and external price and interest rate shocks. Domestic money demand shocks do not, however, necessitate a change in the exchange rate. The analysis suggests that nominal income targets are an optimal policy only if supply and world interest rate shocks do not occur. Alternatively, they are optimal if monetary stability carries no weight in the policy-makers' objective function and fiscal policy can be directed against supply shocks.

Suggested Citation

  • Alogoskoufis, George, 1988. "On Optimal Stabilization Policy and Nominal Income Targets in an Open Economy," CEPR Discussion Papers 220, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:220
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=220
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:220. 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: (). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.