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| Author: | Galí, J. Monacelli, T. |
| Title: | Monetary policy and exchange rate volatility in a small open economy |
| Journal: | Review of Economic Studies
2005 : VOL, 72:3 (252), p. 707-734 |
| Index terms: | exchange rates inflation monetary policy open economy volatility |
| Language: | eng |
| Abstract: | This paper lays out a small open economy version of the Calvo sticky price model, and shows how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap. It analyses the macroeconomic implications of three alternative rule-based policy regimes for the small open economy. Those are domestic inflation and CPI-based Taylor rules, and an exchange rate peg. It also discusses a special case for which domestic inflation targeting constitutes the optimal policy. |
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