Optimal monetary policy delegation under incomplete exchange rate pass-through

Arbeitspapier

The central bank's optimal objective function is analyzed in a small open economy model allowing for incomplete exchange rate pass-through. The results indicate that social welfare can only be marginally improved by including an explicit exchange-rate term in the delegated objective function, irrespective of the degree of pass-through. An implicit response to the exchange rate, through Consumer Price Index (CPI) inflation targeting is, however, beneficial. Welfare can, moreover, be enhanced by appointing a central banker with a greater preference for interest rate smoothing than that of the society, as a result of surpassing some of the stabilization bias arising under a discretionary policy. Consequently, there are welfare gains from monetary policy inertia. The optimal degree of interest rate smoothing is increasing in the degree of pass-through.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SSE/EFI Working Paper Series in Economics and Finance ; No. 477

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Central Banks and Their Policies ; Open Economy Macroeconomics
• Subject: Exchange rate pass-through ; inflation targeting ; interest rate inertia ; monetary policy ; small open economy ; Geldpolitik ; Diskretionäre Politik ; Exchange Rate Pass-Through ; Offene Volkswirtschaft ; Wohlfahrtseffekt ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Adolfson, Malin
• Event: Veröffentlichung
• (who): Stockholm School of Economics, The Economic Research Institute (EFI)
• (where): Stockholm
• (when): 2001

Further information

• Handle: http://hdl.handle.net/10419/56078
• Last update: 10.03.2025, 11:42 AM CET