Monetary Policy, Incomplete Asset Markets, and Welfare in a Small Open Economy
We develop a small open economy model with capital, sticky prices, and a simple form offinancial frictions. We compare welfare levels under three alternative rules: a domestic inflation-based Taylor rule, a CPI inflation-based Taylor rule, and an exchange rate peg. We show that the superiority of an exchange rate peg over a domestic inflation-based Taylor rule becomes more pronounced under incomplete financial asset markets and more severe financial frictions.
Small open economy, DSGE, Welfare comparison, Incompletefinancial market, Ramsey policy, Exchange rate regime
E42, E44, E52, F31, F41, G15
Research Institute for Economics and Business Administration
Rokkodai-cho, Nada-ku, Kobe
Faculty of Business, Aichi Shukutoku University