Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82406
Authors: 
Adolfson, Malin
Year of Publication: 
2002
Series/Report no.: 
Sveriges Riksbank Working Paper Series 135
Abstract: 
This paper analyzes the central bank’s optimal objective function in a small open economy model allowing for incomplete exchange rate pass-through. The results indicate that there are welfare gains from different types of monetary policy inertia. The welfare improvements of exchange rate stabilization are, however, dependent on the degree of discretionary stabilization bias. If the stabilization bias has been mitigated through a low weight on output stabilization social welfare can not be improved by inclusion of an explicit exchange rate term in the delegated objective function, irrespective of the degree of pass-through. Welfare can, though, be enhanced by appointing a central banker with greater preference for interest rate smoothing than that of society. The optimal degree of interest rate smoothing is increasing in the degree of pass-through.
Subjects: 
Exchange rate pass-through
inflation targeting
interest rate inertia
monetary policy
small open economy
JEL: 
E52
E58
F41
Document Type: 
Working Paper

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