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A Viable Solution to a Small Open-Economy Monetary Policy Problem

Author

Listed:
  • Jacek B. Krawczyk

    (Victoria University of Wellington)

  • Kunhong Kim

    (Victoria University of Wellington)

Abstract

In some real-life intertemporal decision problems, which include a country's central-bank interest-rate determination problem, optimisation might be an unsuitable solution procedure in that it suggests a unique ``optimal'' solution for problems where many solutions could be "satisficing". This claim is in line with Herbert A. Simon's (1978 Economics Nobel Prize laureate) postulate that the economists need "satisficing" (his neologism) rather than "optimising" solutions. We aim to use viability theory that rigorously captures the essence of satisficing to study a monetary policy problem. The latter is defined as a qualitative game between a central bank, which wants to keep inflation under control and an ``evil" agent that represents the foreign exchange rate impact on the local economy. We show that satisficing adjustment rules can be endogenously obtained

Suggested Citation

  • Jacek B. Krawczyk & Kunhong Kim, 2006. "A Viable Solution to a Small Open-Economy Monetary Policy Problem," Computing in Economics and Finance 2006 188, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:188
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    Cited by:

    1. Krawczyk, Jacek B & Pharo, Alastair & Simpson, Mark, 2011. "Approximations to viability kernels for sustainable macroeconomic policies," Working Paper Series 1531, Victoria University of Wellington, School of Economics and Finance.
    2. Jacek Krawczyk & Kunhong Kim, 2014. "Viable Stabilising Non-Taylor Monetary Policies for an Open Economy," Computational Economics, Springer;Society for Computational Economics, vol. 43(2), pages 233-268, February.

    More about this item

    Keywords

    macroeconomic modelling; dynamic systems; viability theory;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D99 - Microeconomics - - Micro-Based Behavioral Economics - - - Other

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