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Forward Guidance in Small Open Economy

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  • André, Marine-Charlotte
  • Traficante, Guido

Abstract

We examine forward guidance in a small open economy New Keynesian model. In a setup where forward guidance duration is known with certainty, we show that the elasticity of in ation with respect to the real exchange rate is a key variable in attenuating the forward guidance puzzle. Then we consider a credible forward guidance regime which is adopted stochastically, in normal times or under a liquidity trap. Compared to closed economy, forward guidance turns out to be more expansionary in open economy and the real exchange rate is a key variable driving this result. In particular, the response of output and inflation is amplifi�ed when aggregate supply is negatively related to the real exchange rate.

Suggested Citation

  • André, Marine-Charlotte & Traficante, Guido, 2020. "Forward Guidance in Small Open Economy," MPRA Paper 104600, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:104600
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    References listed on IDEAS

    as
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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