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Abstract:
The considerable amount of research in recent years on New Keynesian, open-economy models -- models with nominal price rigidities and intertemporally maximizing agents -- has yielded fresh insights for what Alan Blinder has called the "dark art" of making monetary policy. The literature has made its greatest contributions in understanding the transmission of shocks across countries, exchange rate pass-through and the effects of different pricing rules, and how these impact optimal monetary policy rules and international policy coordination. While the literature has by no means solved the great mysteries of open-economy macroeconomics, it has laid out a framework where we can ask normative questions of monetary policy, such as how much a central bank should react to movements in the exchange rate. However, monetary policy remains an empirical endeavour, and would be helped by further work which empirically estimates or calibrates these new models.
Full paper (132 KB PDF)
Keywords
New open-economy macroeconomics, international policy coordination, optimal monetary policy, pricing-to-market, current account dynamics
As Published Elsewhere
Bowman, D., and B. Doyle. 2003. "New Keynesian, Open-Economy Models and Their Implications for Monetary Policy," in Price Adjustment and Monetary Policy, proceedings of a conference held by the Bank of Canada, November 2002. Ottawa: Bank of Canada.
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