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http://ssrn.com/abstract=1517965
 
 

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Monetary Policy and Uncertainty in an Empirical Small Open Economy Model


Alejandro Justiniano


Federal Reserve Bank of Chicago

Bruce J. Preston


Columbia University - Graduate School of Arts and Sciences - Department of Economics

March 14, 2008

FRB of Chicago Working Paper No. 2009-21

Abstract:     
This paper explores optimal policy design in an estimated model of three small open economies: Australia, Canada and New Zealand. Within a class of generalized Taylor rules, we show that to stabilize a weighted objective of output, consumer price inflation and nominal interest variation optimal policy does not respond to the nominal exchange. This is despite the presence of local currency pricing and due, in large part, to observed exchange rate disconnect in these economies. Optimal policies that account for the uncertainty of model estimates, as captured by the parameters' posterior distrbution, similarly exhibit a lack of exchange rate response. In contrast to Brainard (1967), the presence of parameter uncertainty can lead to more or less aggressive policy responses, depending on the model at hand.

Number of Pages in PDF File: 62

Keywords: Open Economy Macroeconomics, Optimal Monetary Policy, Uncertainty, Bayesian Estimation DSGE Models

JEL Classification: E30, F41

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Date posted: December 5, 2009  

Suggested Citation

Justiniano, Alejandro and Preston, Bruce J., Monetary Policy and Uncertainty in an Empirical Small Open Economy Model (March 14, 2008). FRB of Chicago Working Paper No. 2009-21. Available at SSRN: http://ssrn.com/abstract=1517965 or http://dx.doi.org/10.2139/ssrn.1517965

Contact Information

Alejandro Justiniano (Contact Author)
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604
United States
Bruce J. Preston
Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )
420 W. 118th Street
New York, NY 10027
United States
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