Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
964846 | Journal of International Money and Finance | 2007 | 22 Pages |
Abstract
This paper examines the role of interest rate policy in a small open economy, subject to terms of trade shocks and time-varying currency risks. The private sector makes optimal decisions in an intertemporal, non-linear setting with rational, forward-looking expectations. In contrast, the monetary authority chooses an optimal interest rate reaction function, given a loss function that is conditional on the state of the economy and given its “least squares learning” about the evolution of inflation and exchange-rate depreciation. The simulation results of the effects of different policy scenarios on welfare show that, on balance, the preferred stance should be strict inflation targeting.
Keywords
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
G.C. Lim, Paul D. McNelis,