Journal Article

Monetary policy for an open economy: an alternative framework with optimizing agents and sticky prices

B McCallum and E Nelson

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 16, issue 4, pages 74-91
Published in print December 2000 | ISSN: 0266-903X
Published online December 2000 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/16.4.74
Monetary policy for an open economy: an alternative framework with optimizing agents and sticky prices

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The 'new open-economy macroeconomics' seeks to provide an improved bias for monetary and exchange-rate policy through the construction of open-economy models that feature rational expectations, optimizing agents, and slowly adjusting prices of goods. This paper promotes an alternative approach for constructing such models by treating imports not as finished consumer goods but rather as raw-material inputs to the home economy's productive process. This treatment leads to a clean and simple theoretical structure that has some empirical attractions as well. A particular small-economy model is calibrated and its properties exhibited, primarily by means of impulse response functions. The preferred variant is shown to feature a pattern of correlations between exchange-rate changes and inflation that is more realistic than provided by a more standard specification. Important recent events are interpreted in light of the alternative models.

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Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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