Optimal Monetary Policy in Closed Versus Open Economies: An Integrated Approach

14 Pages Posted: 17 Nov 2001 Last revised: 25 Oct 2010

See all articles by Richard Clarida

Richard Clarida

Columbia University - Graduate School of Arts and Sciences - Department of Eco; National Bureau of Economic Research (NBER)

Jordi Galí

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Mark Gertler

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 2001

Abstract

This paper develops a new open economy macro model of optimal monetary for a small open economy. Our main result is that in this model, the optimal policy problem for the small open economy is isomorphic to the closed economy case studied in Clarida, Gali, Gertler (1999). In particular, the optimal policy can be implemented with a Taylor Rule under which the domestic interest rate adjusts to the equilibrium real interest rate and expected inflation in domestic prices.

Suggested Citation

Clarida, Richard H. and Gali, Jordi and Gertler, Mark, Optimal Monetary Policy in Closed Versus Open Economies: An Integrated Approach (November 2001). NBER Working Paper No. w8604, Available at SSRN: https://ssrn.com/abstract=291279

Richard H. Clarida (Contact Author)

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