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Federal Reserve Bank of Cleveland
Working Papers (Old Series)
Optimal monetary policy in a small, open economy: a general-equilibrium analysis
Charles T. Carlstrom
Timothy S. Fuerst
Abstract

This paper uses a model of a small, open economy to address two monetary policy issues: 1) What restrictions on the policy rule ensure that the central bank does not introduce real indeterminacy into the economy? and 2) What is the optimal long-run rate of inflation? The model's simplicity makes analyzing determinacy issues remarkably transparent. As for long-run inflation rates, a small, open economy takes the foreign nominal interest rate as a given. To the extent that this rate distorts domestic behavior, positive domestic nominal rates (in contrast to Friedman's celebrated optimum quantity of money) play a role.


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Charles T. Carlstrom & Timothy S. Fuerst, Optimal monetary policy in a small, open economy: a general-equilibrium analysis, Federal Reserve Bank of Cleveland, Working Papers (Old Series) 9911, 1999.
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Keywords: Monetary policy ; Inflation (Finance)
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