Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/320014 
Year of Publication: 
2020
Series/Report no.: 
CASMEF Working Paper Series No. WP 2020/08
Publisher: 
LUISS Guido Carli, Department of Economics and Finance, Arcelli Centre for Monetary and Financial Studies, Rome
Abstract: 
We examine forward guidance in a small open economy New Keynesian model. In a setup where forward guidance duration is known with certainty, we show that the elasticity of inflation with respect to the real exchange rate is a key variable in attenuating the forward guidance puzzle. Then we consider a credible forward guidance regime which is adopted stochastically, in normal times or under a liquidity trap. Compared to closed economy, forward guidance turns out to be more expansionary in open economy and the real exchange rate is a key variable driving this result. In particular, the response of output and inflation is amplified when aggregate supply is negatively related to the real exchange rate.
Subjects: 
Monetary policy
small open economy
forward guidance
JEL: 
E31
E52
Document Type: 
Working Paper

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