The Desirable Smooth Operator, Incomplete Pass Through And The "Zero Bound"
The typical New-Keynesian small-open-economy model has qualitative features and monetary-policy prescriptions similar to their original closed-economy counterparts - i.e. complete stablization of domestic inflation is sufficient for optimal policy. We consider a version of the model here where that isomorphism no longer holds and where the zero-interest-rate lower bound matters. Under the commitment benchmark, the optimal interest-rate rule is intrinsically intertial. Under time-consistent policy, it is still optimal to delegate policy to an interest-rate smoothing central banker despite the fact that complete stablization od domestic inflation is no longer possible. We thus extend the analysis of Woodford (1999) to a nontrivial small open economy setting. Our result is robust to alternative degrees of pass through, the types of shocks impinging the natural rate, and minor departures from optimal pricing behaviour.
|Date of creation:||Jan 2006|
|Date of revision:|
|Contact details of provider:|| Postal: Crawford Building, Lennox Crossing, Building #132, Canberra ACT 2601|
Phone: +61 2 6125 4705
Fax: +61 2 6125 5448
Web page: http://cama.crawford.anu.edu.au
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.:
- Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
- Tommaso Monacelli, 2003.
"Monetary Policy in a Low Pass-Through Environment,"
228, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Marco A. Espinosa-Vega & Alessandro Rebucci, 2003.
"Retail Bank Interest Rate Pass-Through: Is Chile Atypical?,"
Working Papers Central Bank of Chile
221, Central Bank of Chile.
- Marco A. Espinosa-Vega & Alessandro Rebucci, 2004. "Retail Bank Interest Rate Pass-through: Is Chile Atypical?," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Antonio Ahumada & J. Rodrigo Fuentes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking Market Structure and Monetary Policy, edition 1, volume 7, chapter 5, pages 147-182 Central Bank of Chile.
- Alessandro Rebucci & Marco A Espinosa-Vega, 2003. "Retail Bank Interest Rate Pass-Through; Is Chile Atypical?," IMF Working Papers 03/112, International Monetary Fund.
- Lim, G. C. & McNelis, Paul D., 2004. "Learning and the monetary policy strategy of the European Central Bank," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 997-1010.
- Dennis, Richard & Soderstrom, Ulf, 2006.
"How Important Is Precommitment for Monetary Policy?,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 38(4), pages 847-872, June.
- Ulf Soderstrom & Richard Dennis, 2003. "How Important is Precommitment for Monetary Policy?," Computing in Economics and Finance 2003 49, Society for Computational Economics.
- Dennis, Richard & Söderström, Ulf, 2002. "How Important Is Precommitment for Monetary Policy?," Working Paper Series 139, Sveriges Riksbank (Central Bank of Sweden).
- Richard Dennis & Ulf Soderstrom, 2002. "How important is precommitment for monetary policy?," Working Paper Series 2002-10, Federal Reserve Bank of San Francisco.
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- Jeffery D. Amato & Thomas Laubach, 2002.
"Rule-of-thumb behaviour and monetary policy,"
Finance and Economics Discussion Series
2002-5, Board of Governors of the Federal Reserve System (U.S.).
- 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.
When requesting a correction, please mention this item's handle: RePEc:een:camaaa:2006-03. 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: (Cama Admin)
If references are entirely missing, you can add them using this form.