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Caution or Activism? Monetary Policy Strategies in an Open Economy

Author

Listed:
  • Martin Ellison

    (University of Warwick and CEPR)

  • Lucio Sarno

    (Universty of Warwick and CEPR)

  • Jouko Vilmunen

    (Bank of Finland)

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 then 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

Suggested Citation

  • Martin Ellison & Lucio Sarno & Jouko Vilmunen, 2006. "Caution or Activism? Monetary Policy Strategies in an Open Economy," Computing in Economics and Finance 2006 214, Society for Computational Economics.
    • Handle: RePEc:sce:scecfa:214
    as

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    File URL: http://repec.org/sce2006/up.21223.1140691456.pdf
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    References listed on IDEAS

    as
    1. Wieland, Volker, 2000. "Monetary policy, parameter uncertainty and optimal learning," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 199-228, August.
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    7. Svensson, Lars E O, 1999. "Price-Level Targeting versus Inflation Targeting: A Free Lunch?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 277-295, August.
    8. Ellison, Martin & Vilmunen, Jouko, 2005. "A simple approach to identifying the incentives for policy experimentation," Economics Letters, Elsevier, vol. 86(2), pages 167-172, February.
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    12. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, April.
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    Citations

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    Cited by:

    1. Philip Arestis & Alexander Mihailov, 2011. "Classifying Monetary Economics: Fields And Methods From Past To Future," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 769-800, September.
    2. Claus Rabe & Harris Selod, "undated". "Place-based economic policies: international lessons for South Africa," Working Papers 11, Economic Research Southern Africa.
    3. James Bullard & Eric Schaling, 2009. "Monetary Policy, Determinacy, and Learnability in a Two‐Block World Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1585-1612, December.
    4. Eric Schaling & James Bullard, 2005. "Monetary Policy, Determinacy, and Learnability in the Open Economy," Working Papers 011, Economic Research Southern Africa.
    5. Eric Schaling & James Bullard, 2005. "Monetary Policy, Determinacy, and Learnability in the Open Economy," Computing in Economics and Finance 2005 362, Society for Computational Economics.
    6. Bigio, Saki, 2010. "Learning under fear of floating," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1923-1950, October.
    7. Li Qin & Moïse Sidiropoulos, 2016. "Robustness of Optimal Interest Rate Rules in an Open Economy," Bulletin of Applied Economics, Risk Market Journals, vol. 3(1), pages 29-46.

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    More about this item

    Keywords

    open economy; learning; monetary policy;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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