Interest rate rules and welfare in open economies

Date

2008-07-01

Author

Senay, Ozge

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This paper analyses the welfare performance of a set of five alternative interest rate rules in an open economy stochastic dynamic general equilibrium model with nominal rigidities. A rule with a lagged interest rate term, high feedback on inflation and low feedback on output is found to yield the highest welfare for a small open economy. This result is robust across different degrees of openness, different sources of home and foreign shocks, alternative foreign monetary rules and different specifications for price-setting behaviour. The same rule emerges as both the Nash and cooperative equilibria in a two-country version of the model.

Subject Keywords

Economics and Econometrics, Sociology and Political Science

URI

https://hdl.handle.net/11511/64254

Collections

Department of Economics, Article