Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/121043
Authors: 
Sedghi-Khorasgani, Hossein
Year of Publication: 
2010
Series/Report no.: 
FIW Working Paper 42
Abstract: 
This paper investigates the effect of financial instability on the design of monetary policy rule for a small open economy. We find evidence that optimal monetary policy rule reacts directly to financial imbalances and, as a result, to the real exchange rate movements. However, optimal rule would not react to the real exchange rate changes directly if central bank does not care about the financial instability. For a quantitative analysis, impulse responses of some macroeconomic variables and financial instability to the domestic productivity and foreign country output shocks, resulting from simulation, are also analysed in this paper.
Subjects: 
Financial instability
Optimal monetary policy rule
Real exchange rate
Open economy
JEL: 
E52
G01
Document Type: 
Working Paper

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