Monetary Policy and Learning in an Open Economy
University of Oxford
City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)
Bank of Finland, Research Unit
January 20, 2004
Bank of Finland Discussion Paper No. 3/2004
In this paper, we examine the incentives for central bank activism and caution in a two-country open-economy model with uncertainty and learning. We find that the presence of a strategic interaction between the home and foreign central banks creates an additional motivation for caution in monetary policy. An activist policy designed to help the learning of the home central bank is suboptimal since it generates a strong reaction from the foreign central bank. As joint learning by the home and foreign central banks is shown to be detrimental to welfare, the optimal policy is cautious.
Number of Pages in PDF File: 27
Keywords: activism, learning, monetary policy, open economy
JEL Classification: D81, D83, E52, E58, F41working papers series
Date posted: February 19, 2004
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