Economics, Econometrics and Finance
4 years ago

Optimal monetary policy design ignores exchange rates in small open economies.

SSRN Electronic Journal
Monetary Policy and Uncertainty in an Empirical Small Open Economy Model
Alejandro Justiniano, Bruce Preston

Paper Summary

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The study looked at how to design the best policies for three small open economies. They found that the best policies don't need to react to changes in exchange rates. Even when considering uncertainty in the model, the optimal policies still don't need to respond to exchange rates. This goes against what was previously thought.