Is Monetary Policy in an Open Economy Fundamentally Different?

25 Pages Posted: 28 Sep 2012

See all articles by Tommaso Monacelli

Tommaso Monacelli

Bocconi University - Department of Economics

Date Written: August 2012

Abstract

Openness per se requires optimal monetary policy to deviate from the canonical closed-economy principle of domestic price stability, even if domestic prices are the only ones to be sticky. I review this argument using a simple partial equilibrium analysis in an economy that trades in final consumption goods. I then extend the standard open economy New Keynesian model to include imported inputs of production. Production openness strengthens even further the incentive for the policymaker to deviate from strict domestic price stability. With both consumption and production openness variations in the world price of food and in the world price of imported oil act as exogenous cost-push factors.

Keywords: consumption imports, exchange rate, imported inputs, monetary policy, openness, trade

JEL Classification: E52, F41

Suggested Citation

Monacelli, Tommaso, Is Monetary Policy in an Open Economy Fundamentally Different? (August 2012). CEPR Discussion Paper No. DP9087. Available at SSRN: https://ssrn.com/abstract=2153537

Tommaso Monacelli (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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