Monetary Policy and Exchange Rate Volatility in a Small Open Economy

摘要

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 representation in domestic inflation and the output gap.We use the resulting framework to analyse the macroeconomic implications of three alternative rule-based policy regimes for the small open economy:domestic inflation and CPI-based Taylor rules,and an exchange rate peg.We show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail.We also discuss a special case for which domestic inflation targeting constitutes the optimal policy,and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules.