Optimal Monetary Policy In A Small Open Economy With Habit Formation And Nominal Rigidities
- Topics:
- Global Strategy
- Source:
- International Monetary Fund
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Overview: Introducing habit formation into an open economy macroeconomic model with price stickiness, it examines the characteristics of an optimal monetary policy. It finds that, first; the optimal policy rule entails interest rate smoothing and responds to the lagged values. Second, habit formation enriches the dynamics of the economy with a persistent, hump-shaped response of consumption to shocks. Finally, when habit formation does matter, the optimal policy rule achieves a greater welfare improvement over alternative policy rules by achieving lower macroeconomic variability.
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Format: PDF | Size: 1,096KB | Date: Jan 2003 | Pages: 34
