The timing of asset trade and optimal policy in dynamic open economies

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    Abstract

    Using a standard open economy DSGE model, it is shown that the timing of asset trade relative to policy decisions has a potentially important impact on the welfare evaluation of monetary policy at the individual country level. If asset trade in the initial period takes place before the announcement of policy, a national policymaker can choose a policy rule which reduces the work effort of households in the policymaker’s country in the knowledge that consumption is fully insured by optimally chosen international portfolio positions. But if asset trade takes place after the policy announcement, this insurance is absent and households in the policymaker’s country bear the full consumption consequences of the chosen policy rule. The welfare incentives faced by national policymakers are very different between the two cases. Numerical examples confirm that asset market timing has a significant impact on the optimal policy rule.
    Original languageEnglish
    Pages (from-to)1543-1573
    Number of pages31
    JournalMacroeconomic Dynamics
    Volume17
    Issue number8
    Early online date19 Mar 2013
    DOIs
    Publication statusPublished - Dec 2013

    Keywords

    • Asset trade
    • Optimal monetary policy
    • Monetary policy in open economies
    • International financial markets

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