Optimal Monetary Policy and Exchange Rate in a Small Open Economy with Unemployment
- Authors
- 이혁재; 송정석
- Issue Date
- 2014
- Keywords
- Monetary Policy; Exchange Rate; Unemployment; Small Open Economy
- Citation
- East Asian Economic Review, v.18, no.3, pp 301 - 335
- Pages
- 35
- Journal Title
- East Asian Economic Review
- Volume
- 18
- Number
- 3
- Start Page
- 301
- End Page
- 335
- URI
- https://scholarworks.bwise.kr/cau/handle/2019.sw.cau/13132
- DOI
- 10.11644/KIEP.JEAI.2014.18.3.284
- ISSN
- 2508-1640
2508-1667
- Abstract
- In this paper, we consider a small open economy under the New Keynesian model with unemployment of Gali (2011a, b) to discuss the design of the monetary policy. Our findings can be summarized in three parts. First, even with the existence of unemployment, the optimal policy is to minimize variance of domestic price inflation, wage inflation, and the output gap when both domestic price and wage are sticky. Second, stabilizing unemployment rate is important in reducing the welfare loss incurred by both technology and labor supply shocks. Therefore, introducing the unemployment rate as an another argument into the Taylor-rule type interest rate rule will be welfare-enhancing. Lastly, controlling CPI inflation is the best option when the policy is not allowed to respond to unemployment rate. Once the unemployment rate is controlled, however, stabilizing power of CPI inflation-based Taylor rule is diminished.
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Collections - Graduate School > Department of Trade & Logistics > 1. Journal Articles
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