We study how monetary policy should respond to shocks which permanently alter the steady state structure of the economy. In such a case monetary policy affects also relative prices which stimulate reallocation of capital. We consider a permanent and negative shock to export revenues that...

We study how monetary policy should respond to shocks which permanently alter the steady state structure of the economy. In such a case monetary policy affects not only the short run misallocations due to nominal rigidities, but also relative prices which stimulate reallocation of capital. We...