New Policy Rule for Open Economies Reduces Exchange Rate Fluctuations
The article discusses how the best way to set monetary policy changes in open economies compared to closed ones. In a closed economy, the ideal policy is a 'Taylor rule' based on output and inflation. However, in an open economy, the best approach is a 'Monetary Conditions Index' that considers both interest rates and exchange rates. Additionally, focusing on long-term inflation instead of short-term inflation helps stabilize exchange rates and output, preventing big fluctuations.