Monetary Policy and Exchange Rate Volatility in a Small Open Economy / Jordi Gali, Tommaso Monacelli.

Format:

Book

Author/Creator:

Gali, Jordi.

Contributor:

National Bureau of Economic Research.

Monacelli, Tommaso.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8905.

NBER working paper series no. w8905

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

We lay out a small open economy version of the Calvo sticky price model, and show how the equilibrium dynamics can be reduced to a tractable canonical system in domestic inflation and the output gap. We employ this framework to analyze the macroeconomic implications of three alternative monetary policy regimes for the small open economy: domestic inflation targeting, CPI targeting and an exchange rate peg. We show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail. We also discuss a special case for which domestic inflation targeting constitutes the optimal policy, and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with suboptimal regimes.

Notes:

Print version record

April 2002.