Research Discussion Papers, Bank of Finland
Monetary policy and learning in an open economy
(), Lucio Sarno and Jouko Vilmunen
Abstract: In this paper, we examine the incentives for central bank
activism and caution in a two-country open-economy model with uncertainty
and learning. We find that the presence of a strategic interaction between
the home and foreign central banks creates an additional motivation for
caution in monetary policy. An activist policy designed to help the
learning of the home central bank is suboptimal since it generates a strong
reaction from the foreign central bank. As joint learning by the home and
foreign central banks is shown to be detrimental to welfare, the optimal
policy is cautious.
Keywords: activism; learning; monetary policy; open economy; (follow links to similar papers)
JEL-Codes: D81; D83; E52; E58; F41; (follow links to similar papers)
27 pages, January 20, 2004
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