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The Timing of Asset Trade and Optimal Policy in Dynamic Open Economies

  • Ozge Senay
  • Alan Sutherland

Using a standard open economy DSGE model, it is shown that the timing of asset trade relative to policy decisions has a potentially important impact on the welfare evaluation of monetary policy at the individual country level. If asset trade in the initial period takes place before the announcement of policy, a national pol?icymaker can choose a policy rule which reduces the work effort of households in the policymaker¡¯s country in the knowledge that consumption is fully insured by optimally chosen international portfolio positions. But if asset trade takes place after the policy announcement, this insurance is absent and households in the poli?cymaker¡¯s country bear the full consumption consequences of the chosen policy rule. The welfare incentives faced by national policymakers are very different between the two cases. Numerical examples confirm that asset market timing has a significant impact on the optimal policy rule.

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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201006.

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Date of creation: 15 Jul 2010
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Handle: RePEc:san:cdmawp:1006
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