Monetary Policy in a Very Open Economy: Some Major Analytical Issues

34 Pages Posted: 20 Feb 2014

See all articles by Bennett T. McCallum

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

Date Written: February 2014

Abstract

This paper develops three considerations relevant to the possibility of modification of the Hong Kong currency board system for conducting monetary/exchange‐rate policy. The first concerns the system employed by Singapore, an economy similar in several ways to Hong Kong's, whereby the exchange rate is adjusted periodically in activist response to inflation and output developments. The second concerns a generalization, one that calls for adjustments of a weighted average of exchange rate and interest rate instruments, so designed to be effective whether the economy is, or is not, in a liquidity‐trap situation. Finally, the third topic concerns political‐economy aspects of policy, which tend to incline against the use of the activist systems.

Suggested Citation

McCallum, Bennett T., Monetary Policy in a Very Open Economy: Some Major Analytical Issues (February 2014). Pacific Economic Review, Vol. 19, Issue 1, pp. 27-60, 2014. Available at SSRN: https://ssrn.com/abstract=2398671 or http://dx.doi.org/10.1111/1468-0106.12051

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