30 Pages Posted: 24 Apr 2008
In this paper, the optimal choice of a monetary target is investigated for a small open economy that is subject to foreign monetary policy shocks. In contrast to large parts of the literature, pegging the exchange rate is never the best policy choice for the small open economy in our model. Instead, monetary targeting and, depending on the parameter combination, producer price index targeting come closest to the optimal policy rule in terms of welfare. Generally, the welfare performance of the simple targeting rules under consideration hinge critically on the degree of pass-through in the home economy and in the rest of the world.
Suggested Citation: Suggested Citation
Berger, Wolfram, Monetary Policy Rules for a Small Open Economy. Economic Notes, Vol. 37, Issue 1, pp. 1-30, February 2008. Available at SSRN: https://ssrn.com/abstract=1124631 or http://dx.doi.org/10.1111/j.1468-0300.2008.00190.x
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