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Degree of openness and inflation targeting policy: model of a small open economy

Author

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  • Jihene Bousrih
Abstract
Purpose - The purpose of this paper is to deal with the dynamics of a Neo‐Keynesian model applied to a small open economy, in order to show the impact of commercial openness on the choice of the optimal inflation target. Design/methodology/approach - The author uses a neo‐Keynesian model with calibration for Chile. Findings - The results show that there is a relation between the degree of openness and the type of inflation targeting policy. Originality/value - The originality of the paper is to use a neo‐Keynesian model to deal with a small open economy, which uses inflation targeting as a monetary rule.

Suggested Citation

  • Jihene Bousrih, 2012. "Degree of openness and inflation targeting policy: model of a small open economy," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 4(3), pages 232-246, July.
    • Handle: RePEc:eme:jfeppp:v:4:y:2012:i:3:p:232-246
    DOI: 10.1108/17576381211245962
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    1. McCallum, Bennett T & Nelson, Edward, 2000. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 16(4), pages 74-91, Winter.
    2. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
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    4. Amato, Jeffery D. & Gerlach, Stefan, 2002. "Inflation targeting in emerging market and transition economies: Lessons after a decade," European Economic Review, Elsevier, vol. 46(4-5), pages 781-790, May.
    5. David Romer, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 869-903.
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    7. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
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    18. Paul Conway & Aaron Drew & Ben Hunt & Alasdair Scott, 1998. "Exchange rate effects and inflation targeting in a small open economy: a stochastic analysis using FPS," Reserve Bank of New Zealand Discussion Paper Series G99/4, Reserve Bank of New Zealand.
    19. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Closed versus Open Economies: An Integrated Approach," NBER Working Papers 8604, National Bureau of Economic Research, Inc.
    20. Jordi Gali & Tommaso Monacelli, 1999. "Optimal Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Boston College Working Papers in Economics 438, Boston College Department of Economics, revised 15 Nov 1999.
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    More about this item

    Keywords

    Chile; National economy; Monetary policy; Prices; Inflation; Consumer price index inflation; Producer price index inflation; Pass‐through; Degree of openness;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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