Foreign Money Shocks and the Welfare Performance of Alternative Monetary Policy Regimes

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    Abstract

    The welfare properties of monetary policy regimes for a country subject to foreign money shocks are examined in a two-country sticky-price model. Money targeting is found to be welfare superior to a fixed exchange rate when the expenditure switching effect of exchange rate changes is relatively weak, but a fixed rate is superior when the expenditure switching effect is strong. However, price targeting is superior to both these regimes for all values of the expenditure switching effect. A welfare-maximising monetary rule yields lower output and exchange rate volatility than price targeting for a wide range of parameter values.

    Original languageEnglish
    Pages (from-to)245-266
    Number of pages22
    JournalScandinavian Journal of Economics
    Volume109
    Issue number2
    DOIs
    Publication statusPublished - Jun 2007

    Keywords

    • monetary policy
    • foreign monetary shocks
    • expenditure switching
    • EXCHANGE-RATE
    • OPEN-ECONOMY
    • RULES

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