English, Article, Journal or magazine article edition: Optimal Monetary Policy in a Small Open Economy under Segmented Asset Markets and Sticky Prices Ruy Lama; Juan Pablo Medina

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Optimal Monetary Policy in a Small Open Economy Under Segmented Asset Markets and Sticky Prices
Author
  • Ruy Lama
  • Juan Pablo Medina
Physical Description
  • preprint
Notes
  • This paper studies optimal monetary policy in a two-sector small open economy model under segmented asset markets and sticky prices. We solve the Ramsey problem under full commitment, and characterize the optimal monetary policy in a calibrated version of the model. The findings of the paper are threefold. First, the Ramsey solution mimics the allocations under flexible prices. Second, under the optimal policy the volatility of non-tradable inflation is close to zero. Third, 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. This last result suggests that policymakers should resort to other policy instruments in order to correct financial imperfections.
  • Working Paper , Monetary policy , Prices , Financial assets , Markets , Economic models ,
  • RePEc:imf:imfwpa:07/​217
  • Optimal monetary policy; Asset market segmentation; Sticky prices.
  • RePEc:red:sed005:774
  • This paper studies optimal monetary policy in a two-sector small open economy model under segmented asset markets and sticky prices. We solve the Ramsey problem under full commitment, and characterize the optimal monetary policy in a version of the model calibrated to the Chilean economy. The contributions of the paper are twofold. First, under the optimal policy the volatility of nontradable inflation is near zero. Second, stabilizing non-tradable 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. This last result suggests that policymakers should resort to other instruments in order to correct financial imperfections.
  • RePEc:chb:bcchwp:286
Language
  • English
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