CAUTION OR ACTIVISM? MONETARY POLICY STRATEGIES IN AN OPEN ECONOMY
We examine optimal policy in an open-economy model with uncertainty and learning, where monetary policy actions affect the economy through the real exchange rate channel. Our results show that the degree of caution or activism in optimal policy depends on whether central banks are in coordinated or uncoordinated equilibrium. If central banks coordinate their policy actions then activism is optimal. In contrast, if there is no coordination, caution prevails. In the latter case caution is optimal because it helps central banks to avoid exposing themselves to manipulative actions by other central banks.
Key Words: Learning; Monetary Policy; Open Economy.
c1 Address correspondence to: Lucio Sarno, Professor of Finance, Warwick Business School, Coventry, CV4 7AL, United Kingdom; e-mail: firstname.lastname@example.org.