A stochastic general-equilibrium model is used to explore the welfare effects of optimal monetary policy and the potential benefits of policy coordination. Cross-country perfectly symmetric shocks in the traded goods sectors and imperfectly correlated shocks in the non-traded goods sectors are...

In this paper, the optimal choice of a monetary target is investigated for a small open economy that is subject to foreign monetary policy shocks. In contrast to large parts of the literature, pegging the exchange rate is never the best policy choice for the small open economy in our model....

This paper studies the optimal design of monetary policy in an optimizing two-country sticky price model. We suppose that the production sequence of final consumption goods stretches across both countries and is associated with vertical trade. Prices of final consumption goods are sticky in the...

In this paper we explore the optimal policy reaction to boom-bust cycles in asset prices. Bordo and Jeanne (2002a, b) point to the risks of a reactive strategy that only mitigates the consequences of a crisis if and when it occurs. Acting pre-emptively by rigorously counteracting the build-up of...

A stochastic sticky-price general-equilibrium model is employed to explore the welfare effects of optimal monetary policy and of a range of simple targeting rules. Idiosyncratic shocks to the traded and the non-traded goods sectors may make it impossible for monetary policy to achieve an...

We show that a policy of 'benign neglect' towards an asset price boom is not a sensible option when expectations are forward-looking. Policymakers choose between a policy that cuts real interest rates and one that raises them during asset price booms.

In this paper we explore the optimal policy reaction to an asset price boom. Empirical evidence shows that the monetary policy stance is typically loose during asset price booms. Emplying a modified New Keneysian sticky price model we show that this policy of leaning with the wind can be...

This paper studies monetary policy in an optimizing two-country model. We suppose a two-step production process that is associated with vertical trade. Prices of final consumption goods are sticky and pass-through can be incomplete. Monetary authorities should respond to both home and foreign...