Working Paper 00-01
Department of Economics
University of North Carolina, Chapel Hill
http://www.unc.edu/depts/econ

"Alternative Monetary Policy Rules for Small Open Economies"

REVIEW OF INTERNATIONAL ECONOMICS

BY:RICHARD FROYEN

- University of North Carolina at Chapel Hill

ALFRED GUENDER

- University of Canterbury

Contact:Richard Froyen

E-mail:froyen@email.unc.edu

Postal:Department of Economics, CB# 3305, University of North Carolina at Chapel Hill, Chapel Hill, NC 27599-3305

Phone:919-966-5375

Fax:919-966-4986

Co-Auth:Alfred Guender: a.guender@econ.canterbury.ac.nz

ABSTRACT

This paper examines the relative merits of alternative monetary policy rules for a small open economy. Rules considered target: the exchange rate, price level, nominal income or a monetary aggregate. The standard framework employed in previous comparisons of these rules fails to take account of important features of small open economies. In particular, the standard framework fails to consider the effects on aggregate supply of exchange rate adjustments resulting from adherence to policy rules. Incorporating these effects is shown to weaken the case for targeting nominal income and, more generally, to complicate the ranking of policy rules.

JEL Classification Numbers: E52, F41