Optimal Monetary Policy in an Open Economy

37 Pages Posted: 10 Jul 2007 Last revised: 9 Jul 2022

See all articles by Peter J. Stemp

Peter J. Stemp

Australian National University (ANU) - Research School of Social Sciences (RSSS)

Stephen J. Turnovsky

University of Washington - Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 1986

Abstract

This paper analyzes the optimal intertemporal tradeoff between inflation and output in an open economy under perfect foresight. The announcement of the optimal plan may, or may not, generate an initial jump in the exchange rate. That depends upon the real adjustment costs, which such unanticipated changes impose on the economy. In the case that such jumps occur, the question of time consistency of the optimal policy arises. A time consistent solution is obtained provided: (i) the policy maker is not too myopic; (ii) the adjustment costs associated with the jump in the exchange rate are of an appropriate form. The optimal monetary rule is derived and properties of this rule, as well as the overall optimal adjustment of the economy are discussed.

Suggested Citation

Stemp, Peter J. and Turnovsky, Stephen J., Optimal Monetary Policy in an Open Economy (September 1986). NBER Working Paper No. w2018, Available at SSRN: https://ssrn.com/abstract=344811

Peter J. Stemp (Contact Author)

Australian National University (ANU) - Research School of Social Sciences (RSSS) ( email )

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HOME PAGE: http://www.economics.unimelb.edu.au/staffprofile/pstemp.htm

Stephen J. Turnovsky

University of Washington - Institute for Economic Research ( email )

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United States
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CESifo (Center for Economic Studies and Ifo Institute)

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