Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60674
Authors: 
Tille, Cédric
Year of Publication: 
2002
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 147
Abstract: 
The paper explores the optimal monetary policy reaction to productivity shocks in an open economy. Whereas earlier studies assume that countries specialize in producing particular goods, I enrich the analysis by allowing for incomplete specialization. I confirm the finding of Obstfeld and Rogoff (2000)—who build on Friedman (1953)—that a flexible exchange rate is highly valuable in delivering the optimal response to country- specific shocks. Its value is, however, much smaller when shocks are sector-specific, because exchange rate fluctuations then lead to misallocations between different firms within a sector. The limitation on the value of flexibility is sizable even when specialization is high.
Subjects: 
optimal monetary policy, exchange rate flexibility, competitiveness
JEL: 
F31
F41
F42
Document Type: 
Working Paper

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