Optimal Monetary Policy in Closed Versus Open Economies: An Integrated Approach
14 Pages Posted: 17 Nov 2001 Last revised: 25 Oct 2010
Date Written: November 2001
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: Suggested Citation