Optimal Central Bank Conservativeness in an Open Economy.

This paper develops a graphical method to determine the optimal degree of central bank conservativeness in an open economy. Unlike Rogoff (1985), the upper and lower bounds of the interval containing the optimal degree of conservativeness are expressed in terms of the structural parameters of the model. It is shown that optimal central bank conservativeness is higher, the higher the natural rate of unemployment, the greater the benefits of unanticipated inflation, the less inflation-averse society, the smaller the variance of productivity shocks, the smaller real exchange rate variability and the smaller the openness of the economy. These propositions are tested for nineteen industrial countries for the period 1960-93. In testing the model we employ a latent variables method (LISREL) in order to distinguish between actual and optimal monetary regimes. Copyright 2000 by Kluwer Academic Publishers