Hostname: page-component-cd9895bd7-gxg78 Total loading time: 0 Render date: 2024-12-23T06:46:14.425Z Has data issue: false hasContentIssue false
  • English
  • Français

CAUTION OR ACTIVISM? MONETARY POLICY STRATEGIES IN AN OPEN ECONOMY

Published online by Cambridge University Press:  15 August 2007

MARTIN ELLISON ,
LUCIO SARNO  and
JOUKO VILMUNEN
MARTIN ELLISON
Affiliation:
University of Warwick
LUCIO SARNO
Affiliation:
University of Warwick
JOUKO VILMUNEN
Affiliation:
Bank of Finland
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine optimal policy in an open-economy model with uncertainty and learning, where monetary policy actions affect the economy through the real exchange rate channel. Our results show that the degree of caution or activism in optimal policy depends on whether central banks are in coordinated or uncoordinated equilibrium. If central banks coordinate their policy actions then activism is optimal. In contrast, if there is no coordination, caution prevails. In the latter case caution is optimal because it helps central banks to avoid exposing themselves to manipulative actions by other central banks.

Keywords

LearningMonetary PolicyOpen Economy
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 4 , September 2007 , pp. 519 - 541
Copyright
© 2007 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Balvers Ronald J. and Thomas F. Cosimano 1994 Inflation variability and gradualist monetary policy. Review of Economic Studies 61, 721– 738.Google Scholar
Basar Tamer and Mark Salmon 1990 Credibility and the value of information transmission in a model of monetary policy and inflation. Journal of Economic Dynamics and Control 14, 97– 116.Google Scholar
Bertocchi Graziella and Michael Spagat 1993 Learning, experimentation and monetary policy. Journal of Monetary Economics 23, 169– 183.Google Scholar
Blinder Alan S. 1998 Central Banking in Theory and Practice. Cambridge, MA: MIT Press.
Brainard William 1967 Uncertainty and the effectiveness of policy. American Economic Review Papers and Proceedings 57, 411– 425.Google Scholar
Cogley Timothy and Thomas J. Sargent 2006 Anticipated Utility and Rational Expectations as Approximations of Bayesian Decision Making. Mimeo, University of California, Davis and New York University.
DeGroot Morris H. 1962 Uncertainty, information, and sequential experiments. Annals of Mathematical Statistics 44, 404– 419.Google Scholar
Ellison Martin and Jouko Vilmunen 2005 A simple approach to identifying the incentives for policy experimentation. Economics Letters 86, 167– 172.Google Scholar
Frankel Jeffrey A. and Katharine E. Rockett 1988 International macroeconomic policy coordination when policymakers do not agree on the true model. American Economic Review 78, 318– 340.Google Scholar
Ghosh Atish R. and Paul R. Masson 1991 Model uncertainty, learning, and the gains from coordination. American Economic Review 81, 465– 479.Google Scholar
Kiefer Nicholas M. and Yaw Nyarko 1989 Optimal control of an unknown linear process with learning. International Economic Review 30, 571– 586.Google Scholar
Sargent Thomas J. 1987 Dynamic Macroeconomic Theory. Cambridge, MA: Harvard University Press.
Svensson Lars E.O. 1999 Price level targeting versus inflation targeting: A free lunch? Journal of Money, Credit and Banking 31, 277– 295.Google Scholar
Walsh Carl E. 2003 Monetary Theory and Policy 2nd Cambridge, MA: MIT Press.
Wieland Volker 2000a Learning by doing and the value of optimal experimentation—Optimal learning with endogenous information. Journal of Economic Dynamics and Control 24, 501– 534.Google Scholar
Wieland Volker 2000b Monetary policy, parameter uncertainty and optimal learning. Journal of Monetary Economics 46, 199– 228.Google Scholar