TY  - JOUR
AU  - Ball, Laurence
TI  - Policy Rules for Open Economies
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6760
PY  - 1998
Y2  - October 1998
DO  - 10.3386/w6760
UR  - http://www.nber.org/papers/w6760
L1  - http://www.nber.org/papers/w6760.pdf
N1  - Author contact info:
Laurence M. Ball
Department of Economics
Johns Hopkins University
Baltimore, MD 21218
Tel: 410/516-7605
Fax: 410/516-7600
E-Mail: lball@jhu.edu
M1  - published as Laurence M. Ball. "Policy Rules for Open Economies," in John B. Taylor, editor, "Monetary Policy Rules" University of Chicago Press (1999)

AB  - 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.
ER  -