Working Paper

Optimal monetary policy in open economies

Abstract: Research in the international dimensions of optimal monetary policy has long been inspired by a set of fascinating questions, shaping the policy debate in at least two eras of progressive cross-border integration of goods, factors, and assets markets in the years after World War I and from Bretton Woods to today. Namely, should monetary policy respond to international variables such as exchange rates, global business cycle conditions, or global imbalances beyond their in uence on the domestic output gap and inflation? Do exchange rate movements have desirable stabilization and allocative properties? Or, on the contrary, should policymakers curb exchange rate fltuations and be concerned with, and attempt to correct, currency isalignments? Are there large gains the international community could reap by strengthening cross-border monetary cooperation? ; We revisit these classical questions by building on the choice-theoretic monetary literature encompassing the research agenda of he New Keynesian models (see, e.g., Rotemberg and Woodford 1997), the New Classical Synthesis (see, e.g., Goodfriend and King 1997), and especially the New Open Economy Macroeconomics, henceforth NOEM (see, e.g., Svensson and van Wijnbergen 1989, Obstfeld and Rogo 1995). In doing so, we will naturally draw on a well-established set of general principles in stabilization theory, which go beyond open-economy issues. Yet, the main goal of our analysis is to shed light on monetary policy trade-os that are inherently linked to open economies which engage in cross-border trade in goods and assets.

Keywords: Monetary policy;

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Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2010

Number: 2010-13