Is Monetary Policy in an Open Economy Fundamentally Different?

Tommaso Monacelli

No 449, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: Openness per se requires optimal monetary policy to deviate from the canonical closed-economy principle of domestic price stability, even if domestic prices are the only ones to be sticky. I review this argument using a simple partial equilibrium analysis in an economy that trades in ?nal consumption goods. I then extend the standard open economy New Keynesian model to include imported inputs of production. Production openness strengthens even further the incentive for the policymaker to deviate from strict domestic price stability. With both consumption and production openness variations in the world price of food and in the world price of imported oil act as exogenous cost-push factors. Keywords: openness, trade, imported inputs, consumption imports, exchange rate, monetary policy. JEL Classi?cation Numbers: E52, F41.

Date: 2012
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
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