Optimal Monetary Policy in a Small Open Economy Under Segmented Asset Markets and Sticky Prices
IMF Working Papers, September 1, 2007
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- Optimal Monetary Policy in a Small Open Economy Under Segmented Asset Markets and Sticky Prices
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Bibliographic details
- Authors: Juan Pablo Medina Guzman, Ruy Lama
- Published: September 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451867817.001
Overview
- Authors: Juan Pablo Medina Guzman, Ruy Lama
- Publication date: September 1, 2007
- Context: Two-sector small open economy model with segmented asset markets and sticky prices. The Ramsey problem is solved under full commitment and the optimal monetary policy is characterized in a calibrated version of the model.
Key findings
- The Ramsey solution mimics the allocations under flexible prices.
- Under the optimal policy the volatility of non-tradable inflation is close to zero.
- Stabilizing nontradable inflation is optimal regardless of the financial structure of the small open economy.
- Even for a moderate degree of price stickiness, implementing a monetary policy that mitigates asset market segmentation is highly distortionary.
- Policy implication drawn: policymakers should resort to other policy instruments in order to correct financial imperfections.
Subject areas and keywords
- Subject: Asset prices, Consumption, Financial markets, Inflation, National accounts, Prices, Securities markets, Sticky prices
- Keywords: asset market segmentation, Asset prices, Consumption, Inflation, inflation rate, market segmentation, monetary policy, nominal interest rate, open economy, Optimal monetary policy, Securities markets, sensitivity analysis, sticky price, sticky prices, substitution effect, WP