Interest rate rules and welfare in open economies


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Senay O.

SCOTTISH JOURNAL OF POLITICAL ECONOMY, cilt.55, ss.300-329, 2008 (SSCI İndekslerine Giren Dergi) identifier identifier

  • Cilt numarası: 55 Konu: 3
  • Basım Tarihi: 2008
  • Doi Numarası: 10.1111/j.1467-9485.2008.00455.x
  • Dergi Adı: SCOTTISH JOURNAL OF POLITICAL ECONOMY
  • Sayfa Sayıları: ss.300-329

Özet

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.