Monetary and …scal policies interact in many ways. Recently, the stance of …scal policy in a number of countries (including the EU and US) has raised concerns about risks for the outcomes of monetary policy. Our paper …rst shows that these concerns are justi…ed since under an ‘ambitious’…scal policymaker in‡ation bias and lack of monetary policy credibility may obtain in equilibrium even if the...

a r t i c l e i n f o JEL classification: E52 E58 F41 Keywords: Monetary policy rule Incomplete exchange rate pass-through Tobin's Q channel Asset prices This paper focuses on the role of the Tobin's Q channel in a two-country framework in which exporting firms set their prices on the basis of local currency pricing. Incomplete exchange rate pass-through significantly affects the Tobin's Q chan...

a r t i c l e i n f o JEL classification: O11 E52 F41 Keywords: Small open emerging market Optimal monetary policy Dualism Inflation targeting Exchange rate An optimizing model of a small open emerging market economy (SOEME) with dualistic labor markets and two types of consumers, delivers a tractable model for monetary policy. Differences between the SOEME and the SOE are derived. Parameters d...

The paper discusses the choice between in‡ation targeting and monetary targeting as a strategy for the Eurosystem, the actual strategy that the Eurosystem has recently announced, the framework for policy decisions appropriate for achieving the Eurosystem’s goals, the role of exchange rate management in the EMU, and the Eurosystem’s accountability and transparency. The choice between in‡ation ta...

This paper studies optimal monetary policy in an economy where …rms use external funds to …nance operational costs. It is shown that direct and indirect cost channels for monetary policy arise when …rms can default on borrowed funds. The direct cost channel calls for milder contractions in the face of in‡ationary pressures. The indirect cost channel, on the other hand, encourages policy conserv...

A dynamic stochastic general equilibrium monetary model with incomplete asset markets, nominal price rigidities and market imperfections is developed to shed light on the role of exchange rate and its relation with current account dynamics in the formulation of monetary policy. In the recent literature, labelled as new open economy macroeconomics (NOEM), the dynamics of current account do not m...

ARLIER in the decade, a number of industrial countries adopted a framework for carrying out monetary policy that became known as inflation targeting. They adopted this framework as a response to the difficulties they had encountered in conducting their monetary policy using an exchange rate peg or some monetary aggregate as the main intermediate target. At the same time, they saw the move as a ...