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Working Paper

Optimal Monetary Policy in a Small Open Economy: A General Equilibrium Analysis

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This paper uses a model of a small, open economy to address two monetary policy issues: 1) What restrictions on the policy rule ensure that the central bank does not introduce real indeterminacy into the economy? and 2) What is the optimal long-run rate of inflation? The model’s simplicity makes analyzing determinacy issues remarkably transparent. As for long-run inflation rates, a small, open economy takes the foreign nominal interest rate as a given. To the extent that this rate distorts domestic behavior, positive domestic nominal rates (in contrast to Friedman’s celebrated optimum quantity of money) play a role.
09.01.1999ISSN 2573-7953 WP 99-11DOI 10.26509/frbc-wp-199911

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Carlstrom, Charles T., and Timothy S. Fuerst. 1999. “Optimal Monetary Policy in a Small Open Economy: A General Equilibrium Analysis.” Federal Reserve Bank of Cleveland, Working Paper No. 99-11. https://doi.org/10.26509/frbc-wp-199911