Monetary Policy and Learning in an Open Economy

Bank of Finland Discussion Paper No. 3/2004

27 Pages Posted: 19 Feb 2004

See all articles by Martin Ellison

Martin Ellison

University of Oxford

Lucio Sarno

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Jouko Vilmunen

Bank of Finland, Research Unit

Date Written: January 20, 2004

Abstract

In this paper, we examine the incentives for central bank activism and caution in a two-country open-economy model with uncertainty and learning. We find that the presence of a strategic interaction between the home and foreign central banks creates an additional motivation for caution in monetary policy. An activist policy designed to help the learning of the home central bank is suboptimal since it generates a strong reaction from the foreign central bank. As joint learning by the home and foreign central banks is shown to be detrimental to welfare, the optimal policy is cautious.

Keywords: activism, learning, monetary policy, open economy

JEL Classification: D81, D83, E52, E58, F41

Suggested Citation

Ellison, Martin and Sarno, Lucio and Vilmunen, Jouko, Monetary Policy and Learning in an Open Economy (January 20, 2004). Bank of Finland Discussion Paper No. 3/2004, Available at SSRN: https://ssrn.com/abstract=501864 or http://dx.doi.org/10.2139/ssrn.501864

Martin Ellison (Contact Author)

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

Lucio Sarno

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jouko Vilmunen

Bank of Finland, Research Unit ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

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