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Interest Rate Rules and Welfare in Open Economies

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  • Ozge Senay

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Abstract

This paper analyses the welfare performance of a set of five alternative interest rate rules in an open economy stochastic dynamic general equilibrium model with nominal rigidities. A rule with a lagged interest rate term, high feedback on inflation and low feedback on output is found to yield the highest welfare for a small open economy. This result is robust across different degrees of openness, different sources of home and foreign shocks, alternative foreign monetary rules and different specifications for price setting behaviour. The same rule emerges as both the Nash and cooperative equilibria in a two-country version of the model.

Suggested Citation

  • Ozge Senay, 2007. "Interest Rate Rules and Welfare in Open Economies," CDMA Working Paper Series 200715, Centre for Dynamic Macroeconomic Analysis.
  • Handle: RePEc:san:cdmawp:0715
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    Cited by:

    1. James Staveley-O'Carroll & Olena M. Staveley-O'Carroll, 2016. "Exchange Rate Targeting in the Presence of Foreign Debt Obligations," Working Papers 1604, College of the Holy Cross, Department of Economics.
    2. repec:bla:pacecr:v:21:y:2016:i:5:p:541-559 is not listed on IDEAS
    3. Shigeto Kitano & Kenya Takaku, 2016. "External Debt and Taylor Rules in a Small Open Economy," Pacific Economic Review, Wiley Blackwell, vol. 21(5), pages 541-559, December.
    4. Teo, Wing Leong, 2009. "Can exchange rate rules be better than interest rate rules?," Japan and the World Economy, Elsevier, vol. 21(3), pages 301-311, August.
    5. Mykhaylova, Olena, 2010. "Optimal Monetary Policy with Non-Zero Net Foreign Wealth," MPRA Paper 23598, University Library of Munich, Germany.

    More about this item

    Keywords

    Welfare; Monetary Policy; Interest Rate Rules; Second Order Approximation.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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