Monetary policy and exchange rate volatility in a small open economy pdf

Monetary policy and exchange rate volatility in a small open economy, economics working papers 835, department of economics and business, universitat pompeu fabra. Monetary policy and exchange rate interactions in a small open economy article pdf available in scandinavian journal of economics 1101. Dynamic stochastic general equilibrium dsge models to evaluate monetary policy rules anchored in rich microfoundations have become a popular tool for macroeconomic analysis in recent years tovar. To show how fiscal policy affects the transmission mechanism of monetary policy, we extend a standard new keynesian model for a small open economy to allow for the presence of nonseparable. It will also spell out the arguments for and against policymakers responding to exchange rate movements when setting policy. We show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail.

I show that these regimes can be ranked in terms of the implied volatility of macroeconomic variables. These questions are the topic of a paper by jordi gali and tommaso monacelli, published in 2005 and titled monetary policy and exchange rate volatility in a small open economy. An earlier version of this paper was circulated under the title optimal monetary policy and exchange rate volatility in a small open economy. Monetary policy and exchange rate volatility in a small open crei. This is a small open economy model in the nk framework.

Monetary policy and exchange rate volatility in a small open economy, working papers 11, barcelona graduate school of economics. Examining the asymmetric monetary policy response to. Exchange rates are key variables in small open economies. Peculiar to our framework is the application of a ramsey. Economics working papers from department of economics and business, universitat pompeu. Monetary policy and exchange rate volatility in a small open economy, nber working papers 8905, national bureau of economic research, inc. Uip condition and making the exchange rate an important channel for monetary policy and risk premium shocks an important source of economic volatility. He claims that trade integration andrealexchange rate volatility are structurally linked and there is a negative correlation. Our model is a twosector, small open economy, where nominal rigidities are present in the form of sticky nontraded. Canadian economy might affect monetary policy and particularly the exchange rate. Request pdf monetary policy and exchange rate volatility in a small open economy we lay out a small open economy version of the. Evaluation points on the effects of exchange rate changes. Monetary and financial policies in emerging markets. Monetary policy and exchange rate volatility in a small open economy jordi gal.

Optimal monetary policy in a small open economy with home. The stance of fiscal and monetary policies has to be helpful in order for the economy to cope with inflows and outflows. This paper studies the stabilization and welfare properties of various monetary policy regimes in a tractable framework suitable for the analysis of monetary policy in a small open economy. Monetary policy in a small open economic with a preference. Optimal monetary policy with output and asset price. Jordi gali tommaso monacelli december 24, 2003 abstract we lay out a small open economy version of the calvo sticky price model, and show how the equilibrium dynamics can be reduced to a tractable canonical system in domestic in. We employ this framework to analyse the macroeconomic implications of three alternative monetary policy regimes for the small open economy. We lay out a small open economy version of the calvo sticky price model, and show how the.

Capital controls and monetary policy autonomy in a small. Monetary policy in a small open economy with imperfect. We lay out a small open economy version of the calvo sticky price model, and show how the equilibrium dynamics can be. What is the optimal degree of exchange rate volatility. For the conditional volatility of the monetarypolicy shock we use daily data from the federal funds futures markets, following kuttner. Monetary policy and exchange rate volatility in a small open. Monetary policy and exchange rate volatility in asmallopeneconomy. Monetary policy in estimated models of small open and. So for these economies, a floating exchange rate appears to generate exchange rate volatility without any obvious benefit to the economy. Monetary policy, exchange rate flexibility, and exchange. Capital controls and monetary policy autonomy in a small open economy davis, j.

We analyze optimal monetary policy in a small open economy characterized by home bias in consumption. Monetary policy and exchange rate volatility in a small open economy 2002 working paper. It will also spell out the arguments for and against policymakers. What role should the exchange rate play in the design of policy. International reserves, exchange rates, and monetary. We lay out a small open economy version of the calvo sticky price model, and show how. Monetary policy in estimated models of small open and closed economies by. We ask whether past trends call for a less variable exchange rate other than through the direct effect of transactions costs. This economic letter will explore this literature and summarize the role the exchange rate plays in small open economies. Monetary policy in a small open economy bank of canada. To do this we use a smallopeneconomy version of the driver 2002 model. We now explain how we build the three conditional volatilities of interest.

Monetary policy and exchange rate volatility in a small open economy 2002 this item may. Economic fluctuations and growth, international finance and macroeconomics, monetary economics we lay out a small open economy version of the calvo sticky price model, and show how the equilibrium dynamics can be reduced to a. We lay out a small open economy version of the calvo sticky price model, and show how the equilibrium dynamics can be reduced to a simple. Changes in the exchange rate have quite a powerful effect on the economy but we tend to assume ceteris paribus all other factors held. Monetary policy and exchange rate volatility in a small open economy jordi gali crei, upf, cepr and nber and tommaso monacelli igier, universiti bocconi and cepr first version received. In real terms, both the tradeweighted exchange rate and the bilateral randdollar exchange rate are close to. Monetary policy and exchange rate volatility in a small open economy, cepr discussion papers 3346, c. The tradeweighted exchange rate also weakened substantially, by nearly 20 per cent. Gali acknowledges financial support from fundacion ramon areces, the european commission and creabarcelona economics.

An estimated dynamic stochastic general equilibrium model. We lay out a small open economy version of the calvo sticky price model, and show how the equilibrium dynamics can be reduced to a tractable. Taylor rule and a fixed exchange rate regime to the optimal monetary rule for a small open economy in a purely theoretical exercise. Within the context of a small open economy model and building on the work of mihov and santacreu 20, the author analyzes the economic implications of two monetary policy rules. Monetary policy and exchange rate volatility in a small open economy jordi gali, tommaso monacelli.

Monetary policy, exchange rate flexibility and exchange. Anton nakov provided excellent research assistance. Monetary policy in a small open economy with nonseparable. Exchange rates, commodities and the implications of. A seminal contribution of the mundellfleming 1960s framework is the open macroeconomy trilemma aka the impossible trinity that states that a country. Alternative monetary rules for a small open economy. We employ this framework to analyze the macroeconomic implications of three alternative monetary policy regimes for the small open economy. Using a panel of 30 emerging market and developing economies, we employ a panel threshold regression analysis to determine whether policymakers respond differently during appreciation versus. Jordi gali tommaso monacelli july 27, 2004 abstract we lay out a small open economy version of the calvo sticky price model, and show how the equilibrium dynamics can be reduced to simple representation in domestic in.

Pdf monetary policy and exchange rate interactions in a. Monetary policy and exchange rates in small open economies. Excess liquidity oligopoly banking and monetary policy in. Monetary policy and exchange rate volatility in a small. Monetary policy and exchange rate volatility in a small open economy.