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Optimal Taylor Rules in an Estimated Model of a Small Open Economy

Author

Listed:
  • Nooman Rebei
  • Steven Ambler
  • Ali Dib
Abstract
We develop a model of a small open economy with three types of nominal rigidities (domestic goods prices, imported goods prices and wages) and eight different structural shocks. We estimate the model's structural parameters using a maximum likelihood procedure and use it to compute welfare-maximizing Taylor rules for setting domestic short-term interest rates. For these computations, we use a second-order approximation around the model's deterministic steady state, which allows the Taylor rule coefficients to affect the means of consumption, leisure and real balances as well as their variances. Welfare gains from moving to the optimal Taylor rule are substantial, but require a very precise knowledge of the values of the model's structural parameters

Suggested Citation

  • Nooman Rebei & Steven Ambler & Ali Dib, 2004. "Optimal Taylor Rules in an Estimated Model of a Small Open Economy," Econometric Society 2004 North American Summer Meetings 627, Econometric Society.
    • Handle: RePEc:ecm:nasm04:627
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    More about this item

    Keywords

    Economic models; Open economy; Optimal monetary policy; Taylor rules;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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