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Hyeongwoo Kim
''Country-specific shocks and optimal monetary policy''
( 2008, Vol. 5 No.23 )
This paper studies optimal monetary policy responses to country-specific shocks in a simple two-country new open macroeconomic model that features sticky-price and local-currency pricing. Technology shocks in the home country are allowed to diffuse to the foreign country with a one-period lag, and vice versa. We find, even in the presence of price-stickiness and local-currency pricing, real shocks may generate market overreaction, to which central banks respond by implementing contractionary monetary policy. This is exactly opposite to the Devereux and Engel's (2003) prediction and many other''s. However, it may be consistent with empirical evidence of rising nominal interest rates during economic boom.
JEL: E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
F3 - International Finance: General
Manuscript Received : Jun 03 2008 Manuscript Accepted : Sep 17 2008

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