Alternative targets in optimal monetary policy rules in an open economy

Alternative targets in optimal monetary policy rules in an open economy

This report examines the optimal monetary policy rules in a two-country DSGE model with real and nominal rigidities. The model is solved by simulation in discrete time and the optimal rule is selected as the one giving highest utility. We find that (1) targeting wage inflation always delivers welfar...

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Bibliographic Details
Main Authors: Chen, Qin, Dai, Chenyuan, Xia, Bingxing
Other Authors: Chia Wai Mun
Format: Final Year Project
Language:English
Published: 2010
Subjects:
DRNTU::Social sciences::Economic theory::International trade
Online Access:http://hdl.handle.net/10356/39439
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Institution: Nanyang Technological University
Language: English
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Summary:This report examines the optimal monetary policy rules in a two-country DSGE model with real and nominal rigidities. The model is solved by simulation in discrete time and the optimal rule is selected as the one giving highest utility. We find that (1) targeting wage inflation always delivers welfare improvements; (2) targeting exchange rate brings non-decreasing welfare; (3) with interest rate smoothing, monetary authority should give equal weight to inflation targeting and wage inflation targeting. Also, the two-country DSGE model shows a good forecast power after technological shocks and transaction cost shocks.

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