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Abstract:

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CEP Discussion Paper
Monetary Policy Under Alterative Asset Market Structures: the Case of a Small Open Economy
Bianca De Paoli
April 2009
Paper No' CEPDP0923:
Full Paper (pdf)

JEL Classification: F41; G15; E52;E61


Tags: welfare; optimal monetary policy; asset markets; small open economy

Can the structure of asset markets change the way monetary policy should be conducted? Following a linear-quadratic approach, the present paper addresses this question in a New Keynesian small open economy framework. Our results reveal that the configuration of asset markets significantly affects optimal monetary policy and the performance of standard policy rules. In particular, when comparing complete and incomplete markets, the ranking of policy rules is entirely reversed, and so are the policy prescriptions regarding the optimal level of exchange rate volatility.