Optimal Monetary Policy in an Open Economy

Abstract

(1) the policy maker is not too myopic; (ii) the adjustment costs associated with the jump in the exchange rate are of an appropriate form. The optimal monetary rule is derived and properties of this rule, as well as the overall optimal adjustment of the economy are discussed.

Stabilization Theory and Policy: 50 Years after the Phillips Curve

“…These initial adjustment costs are not reflected in the conventional term, but are incorporated in the second term. Stemp and Turnovsky (1987) show that the time consistency, or otherwise, depends critically on q , being time‐consistent if q 1 and time‐inconsistent otherwise.…”

“…These initial jumps presumably impose real dislocational costs on the economy, and these should be taken into account in the design of the optimal policy system. Stemp and Turnovsky (1987) show how, if these initial costs are large enough, it may cease to be optimal for the policy‐maker to re‐optimize along a transitional path.…”