Interest rate rules and welfare in open economies
SCOTTISH JOURNAL OF POLITICAL ECONOMY, vol.55, no.3, pp.300-329, 2008 (SSCI, Scopus)
- Publication Type: Article / Article
- Volume: 55 Issue: 3
- Publication Date: 2008
- Doi Number: 10.1111/j.1467-9485.2008.00455.x
- Journal Name: SCOTTISH JOURNAL OF POLITICAL ECONOMY
- Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
- Page Numbers: pp.300-329
- Open Archive Collection: AVESIS Open Access Collection
- Middle East Technical University Affiliated: No
Abstract
This paper analyses the welfare performance of a set of five alternative interest rate rules in an open economy stochastic dynamic general equilibrium model with nominal rigidities. A rule with a lagged interest rate term, high feedback on inflation and low feedback on output is found to yield the highest welfare for a small open economy. This result is robust across different degrees of openness, different sources of home and foreign shocks, alternative foreign monetary rules and different specifications for price-setting behaviour. The same rule emerges as both the Nash and cooperative equilibria in a two-country version of the model.