Optimal interest rate policy in a small open economy
By: Eric Parrado, Andres Velasco.
Contributors: Velasco, Andrés.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper  8721; Working paper series (National Bureau of Economic Research : Online) ;; working paper no.  8721.
Publisher: National Bureau of Economic Research
Published: 2002
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Monetary policy -- Econometric models.; Interest rates -- Econometric models.
Description: "Using an optimizing model we derive the optimal monetary and exchange rate policy for a small stochastic open economy with imperfect competition and short run price rigidity.  The optimal monetary policy has an exact closed-form solution and is obtained using the utility function of the representative home agent as welfare criterion.  The optimal policy depends on the source of stochastic disturbances affecting the economy, much as in the literature pioneered by Poole (1970).  Optimal monetary policy reacts to domestic and foreign disturbances.  If the intertemporal elasticity of substitution in consumption is less than one, as is likely to be the case empirically, the optimal exchange rate policy implies a dirty float: interest rate shocks from abroad are met partially by adjusting home interest rates, and partially by allowing the exchange rate to move.  This optimal pattern may help rationalize the observed fear of floating"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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