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Relative Price Distortion and Optimal Monetary Policy in Open Economies

Economic Research Institute (82-2-759-5415) 2006.03.30 3283

Relative Price Distortion and Optimal Monetary Policy in Open Economies 

Author :   Jinill Kim, Andrew T.Levin and Tack Yun (FRB)


This paper addressed three issues on the conduct of monetary policy in open economies on the basis of a two-country model with Calvo-type sticky prices. Is the isomorphism of the optimal policy problems between closed and open economies robust to whether the foreign country is buffeted by cost-push shocks? How can we obtain a linear quadratic approximation that replicates the key results of the original optimal policy problem, especially when there is an analytical solution to the original problem in the presence of initial price dispersion? What are optimal policy recommendations for the central banks in open economies when both cost-push shock and initial price dispersion exist?

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