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CAUTION OR ACTIVISM? MONETARY POLICY STRATEGIES IN AN OPEN ECONOMY

Published online by Cambridge University Press:  15 August 2007

MARTIN ELLISON ,
LUCIO SARNO  and
JOUKO VILMUNEN
MARTIN ELLISON
Affiliation:
University of Warwick
LUCIO SARNO
Affiliation:
University of Warwick
JOUKO VILMUNEN
Affiliation:
Bank of Finland
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Abstract

We examine optimal policy in an open-economy model with uncertainty and learning, where monetary policy actions affect the economy through the real exchange rate channel. Our results show that the degree of caution or activism in optimal policy depends on whether central banks are in coordinated or uncoordinated equilibrium. If central banks coordinate their policy actions then activism is optimal. In contrast, if there is no coordination, caution prevails. In the latter case caution is optimal because it helps central banks to avoid exposing themselves to manipulative actions by other central banks.

Keywords

LearningMonetary PolicyOpen Economy
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 4 , September 2007 , pp. 519 - 541
Copyright
© 2007 Cambridge University Press

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