Monetary Policy in the Small Open Economy with Market Segmentation

Jae-Hun Shim

Research output: Working paper / PreprintWorking paper

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Abstract

We extend a New Keynesian small open economy DSGE model with non-tradable goods and intermediate inputs. Firstly, we show that the optimal monetary policy faces a trade-off between composite domestic inflation and output gap stabilization due to net exports externalities. Secondly, we rank alternative monetary policy rules associated with welfare and show that setting graduate interest rates towards their target levels rather than an immediate response is desirable. However, when the economy is highly exposed to foreign goods market and non-tradable productivity shocks, the CPI-based Taylor rule can be the best alternative policy. Lastly, we identify linkages between final and intermediate sectors and explain “sectoral heterogeneity” under the optimal policy and alternative monetary policy regimes.
Original languageEnglish
Place of PublicationBath, U. K.
PublisherDepartment of Economics, University of Bath
Publication statusPublished - Sept 2016

Publication series

NameBath Economics Research Working Papers
Volume53/16

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