Monetary Policy in Open Economies under Imperfect Information

No 72003, Working Papers from Hong Kong Institute for Monetary Research

Abstract: We compare international monetary arrangements that differ in the degree of both policy activism and exchange rate flexibility in a model with policy credibility, nominal wage rigidities and unobservable shocks. Three results stand out. First, the selection of the exchange rate regime is less important than the choice of the degree of activism. Second, unlike conventional wisdom, activistic policies tend to fare worse than passive ones. And third, a passive, fixed exchange rate system has good properties for macroeconomic stability. The results suggest that when the monetary authorities operate under conditions of incomplete information, a passive, fixed exchange rate regime represents a good overall choice.

Keywords: Exchange rate systems; Monetary policy; Imperfect information; Macroeonomic volatility; welfare (search for similar items in EconPapers)
JEL-codes: E32 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2003-04
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