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Article: New research on international economics from B. Depaoli and co-authors summarized.
- Article from:
- Economics Week
- Article date:
- March 13, 2009
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According to recent research from London, the United Kingdom, "This paper analyzes optimal monetary policy in a small open economy featuring monopolistic competition and nominal rigidities. It shows that the utility-based loss function for this economy can be written as a quadratic expression of domestic inflation, output gap and real exchange rate."
"The presence of an internal monopolistic distortion and a terms of trade externality drives optimal policy away from domestic inflation targeting and affects the optimal level of exchange rate volatility. When domestic and foreign goods are close substitutes for each other, the optimal policy rule implies lower real ...