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@techreport{NBERw6760,
 title = "Policy Rules for Open Economies",
 author = "Ball, Laurence",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "6760",
 year = "1998",
 month = "October",
 doi = {10.3386/w6760},
 URL = "http://www.nber.org/papers/w6760",
 abstract = {This paper examines the choice of a monetary-policy rule in a simple macroeconomic model.  In a closed economy, the optimal policy is a output and inflation.  In an open economy, the optimal rule changes in two ways.  First, the policy instrument is a Conditions Index the exchange rate.  Second, on the right side of the rule, inflation is replaced by filters out the transitory effects of exchange-rate movements. The model also implies that pure inflation targeting is dangerous in an open economy, because it creates large fluctuations in exchange rates and output.  Targeting long-run inflation avoids this problem and produces a close approximation to the optimal instrument rule.},
}