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Shigeto Kitano and Kenya Takaku
''Monetary policy, incomplete asset markets, and welfare in a small open economy''
( 2015, Vol. 35 No.1 )
We develop a small open economy model with capital, sticky prices, and a simple form of financial frictions. We compare welfare levels under three alternative rules: a domestic inflation-based Taylor rule, a CPI inflation-based Taylor rule, and an exchange rate peg. We show that the superiority of an exchange rate peg over a domestic inflation-based Taylor rule becomes more pronounced under incomplete financial asset markets and more severe financial frictions.
Keywords: small open economy, DSGE; welfare comparison, incomplete financial market, Ramsey policy, exchange rate regime
JEL: F4 - Macroeconomic Aspects of International Trade and Finance: General
F3 - International Finance: General
Manuscript Received : Nov 30 2014 Manuscript Accepted : Mar 11 2015

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