Optimal Monetary Policy in Open Economies

Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain

doi:10.1016/b978-0-444-53454-5.00004-9

Cited by 135 publications

(64 citation statements)

References 108 publications

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“…Of course, this argument depends on the weights placed on inflation and output gap in the loss function. For an open economy, Woodford (2003) makes the relative weights between output gap and inflation the same as for a closed economy, although inflation in the loss function usually stands for inflation of domestic goods (Corsetti, Dedola, and Leduc 2010). A typical calibration of parameters results in a low weight on the output gap.…”

Section: Counterfactual Exercise: Mimicking Low-inflation Economiesmentioning

confidence: 99%

Divergent Emerging Market Economy Responses to Global and Domestic Monetary Policy Shocks

Choi¹,

Kang²,

Kim³

et al. 2017

ADB Economics Working Paper Series

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Section: Counterfactual Exercise: Mimicking Low-inflation Economiesmentioning

confidence: 99%

Divergent Emerging Market Economy Responses to Global and Domestic Monetary Policy Shocks

Choi¹,

Kang²,

Kim³

et al. 2017

ADB Economics Working Paper Series

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“…Abstracting from this term does not affect any of the results reported in this paper. 10 In reality, the utility flow from bond holdings could well be positive because some agents in the economy must hold certain types of bonds for regulatory reasons.…”

Section: Flexible-price Incomplete-markets Modelmentioning

confidence: 99%

“…In what follows, we refer to η t as a spread shock. 10 Outside of steady state, there may be shocks that put a premium on one bond or the other, arising from flights to safety or liquidity, for example. This type of spread shock is used in a closed-economy context by Smets and Wouters (2007), Christiano, Eichenbaum, and Trabandt (2014), Fisher (2015) and Gust, et al, (2016).…”

Section: Flexible-price Incomplete-markets Modelmentioning

confidence: 99%

Monetary Policy and the Predictability of Nominal Exchange Rates

Eichenbaum¹,

Johannsen²,

Rebelo³

2017

FEDS

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This paper documents two facts about the behavior of floating exchange rates in countries where monetary policy follows a Taylor-type rule. First, the current real exchange rate is highly negatively correlated with future changes in the nominal exchange rate at horizons greater than two years. This negative correlation is stronger the longer is the horizon. Second, for most countries, the real exchange rate is virtually uncorrelated with future inflation rates both in the short and in the long run. We develop a class of models that can account for these and other key observations about real and nominal exchange rates. * The views expressed here are those of the authors and do not necessarily reflect the view of the Board of Governors, the FOMC, or anyone else associated with the Federal Reserve System. We thank Charles Engel and Oreste Tristani for their comments and Martin Bodenstein for helpful discussions.

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“…Hence, the literature …nds that optimal policy is to set interest rates to control a combination of in ‡ation and the output gap (Rotemberg and Woodford (1997), Giannoni and Woodford (2002)) as well as exchange rates (Corsetti, Dedola and Leduc (2010)), house prices (Adam and Woodford (2013)), macroprudential concerns (Smets (2014)), asset prices (Gali (2014)), and so on. These papers are correct: if the only available policy tool is the interest rate, it should be set to maximize social welfare and will therefore respond to all distortions that are a¤ected by monetary policy.…”

Section: The Only Game In Townmentioning

confidence: 99%

Is Optimal Monetary Policy Always Optimal?

Davig

Gürkaynak

2015

SSRN Journal

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No. And not only for the reason you think. In a world with multiple ine¢ ciencies the single policy tool the central bank has control over will not undo all ine¢ ciencies; this is well understood. We argue that the world is better characterized by multiple ine¢ ciencies and multiple policy makers with various objectives. Asking the policy question only in terms of optimal monetary policy e¤ectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the tradeo¤s faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled ‡exible in ‡ation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a suboptimal set. We highlight this issue and call for a broader thinking of optimal policies. JEL Classi…cation: E61, E52, E58, E02.

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Optimal Monetary Policy in Open Economies

Cited by 135 publications

References 108 publications

Divergent Emerging Market Economy Responses to Global and Domestic Monetary Policy Shocks

Divergent Emerging Market Economy Responses to Global and Domestic Monetary Policy Shocks

Monetary Policy and the Predictability of Nominal Exchange Rates

Is Optimal Monetary Policy Always Optimal?

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