{
  "title": "Optimal Monetary Policy in a Small Open Economy with Habit Formation and Nominal Rigidities",
  "publication": "IMF Working Papers, January 1, 2003",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/optimal-monetary-policy-in-a-small-open-economy-with-habit-formation-and-nominal-rigidities-16252",
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  "summary": "Introducing habit formation into an open economy macroeconomic model with price stickiness, we examine the characteristics of an optimal monetary policy.",
  "sections": [
    {
      "heading": "Summary of findings",
      "content": "- Introducing habit formation into an open economy macroeconomic model with price stickiness, the study examines the characteristics of an optimal monetary policy.\n- The optimal policy rule:\n  - Entails interest rate smoothing.\n  - Responds to the lagged values of the foreign interest rate and domestic technology shocks as well as their current values.\n- Habit formation effects:\n  - Enrich the dynamics of the economy with a persistent, hump-shaped response of consumption to shocks.\n- Welfare and macroeconomic variability:\n  - When habit formation does matter, the optimal policy rule achieves a greater welfare improvement over alternative policy rules by achieving lower macroeconomic variability."
    },
    {
      "heading": "Model features and mechanisms",
      "content": "- Key structural elements:\n  - Habit formation in consumer preferences.\n  - Price stickiness (nominal rigidities) in an open economy framework.\n- Dynamic implications:\n  - Persistence in consumption responses to shocks.\n  - Hump-shaped consumption paths following shocks due to habit formation."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Optimal monetary policy should incorporate:\n  - Interest rate smoothing as a design feature.\n  - Responses to both current and lagged foreign interest rates.\n  - Responses to both current and lagged domestic technology shocks.\n- Rationale:\n  - Accounting for habit formation in policy design can yield welfare gains by reducing macroeconomic variability relative to alternative policy rules.\n\n---\n\n Content in this bundle\n\n- wp0305\n  - wp0305 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp0305 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/optimal-monetary-policy-in-a-small-open-economy-with-habit-formation-and-nominal-rigidities-16252"
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    "Authors: Yongseung Jung, Woon Gyu Choi",
    "Published: January 1, 2003",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451842203.001",
    "Introducing habit formation into an open economy macroeconomic model with price stickiness, the study examines the characteristics of an optimal monetary policy.",
    "The optimal policy rule:",
    "Habit formation effects:",
    "Welfare and macroeconomic variability:",
    "Key structural elements:",
    "Dynamic implications:",
    "Optimal monetary policy should incorporate:",
    "Rationale:",
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