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Caution or activism? Monetary policy strategies in an open economy

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Ellison, Martin, Sarno, Lucio and Vilmunen, Jouko. (2007) Caution or activism? Monetary policy strategies in an open economy. Macroeconomic Dynamics, Vol.11 (No.4). pp. 519-541. ISSN 1365-1005

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Official URL: http://dx.doi.org/10.1017/S136510050706021X

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, 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.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Banks and banking, Central, Monetary policy, Economics -- Mathematical models, Organizational learning, Economic policy
Journal or Publication Title:	Macroeconomic Dynamics
Publisher:	Cambridge University Press
ISSN:	1365-1005
Official Date:	15 August 2007
Volume:	Vol.11
Number:	No.4
Page Range:	pp. 519-541
Identification Number:	10.1017/S136510050706021X
Status:	Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Economic and Social Research Council (Great Britain) (ESRC)
Grant number:	RES-000-27-0126 (ESRC)
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URI:	http://wrap.warwick.ac.uk/id/eprint/648