Hostname: page-component-8448b6f56d-cfpbc Total loading time: 0 Render date: 2024-04-24T18:10:07.563Z Has data issue: false hasContentIssue false
  • English
  • Français

THE TIMING OF ASSET TRADE AND OPTIMAL POLICY IN DYNAMIC OPEN ECONOMIES

Published online by Cambridge University Press:  19 March 2013

Ozge Senay  and
Alan Sutherland
Ozge Senay*
Affiliation:
University of St. Andrews
Alan Sutherland
Affiliation:
University of St. Andrews
*
Address correspondence to: Ozge Senay, School of Economics and Finance, University of St Andrews, St Andrews, KY16 9AL, UK; e-mail: os12@st-andrews.ac.uk.
Get access Rights & Permissions [Opens in a new window]

Abstract

Using a standard open economy DSGE model, it is shown that the timing of asset trade relative to policy decisions has a potentially important impact on the welfare evaluation of monetary policy at the individual-country level. If asset trade in the initial period takes place before the announcement of policy, a national policy maker can choose a policy rule that reduces the work effort of households in the policy maker's country, in the knowledge that consumption is fully insured by optimally chosen international portfolio positions. But if asset trade takes place after the policy announcement, this insurance is absent and households in the policy maker's country bear the full consumption consequences of the chosen policy rule. The welfare incentives faced by national policy makers are very different between the two cases. Numerical examples confirm that asset-market timing has a significant impact on the optimal policy rule.

Keywords

Asset TradeOptimal Monetary PolicyMonetary Policy in Open EconomiesInternational Financial Markets
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 8 , December 2013 , pp. 1543 - 1573
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Benigno, Gianluca and Benigno, Pierpaolo (2006) Designing targeting rules for international monetary policy cooperation. Journal of Monetary Economics 53, 473–506.CrossRefGoogle Scholar
Calvo, Guillermo (1983) Staggered prices in a utility-maximising framework. Journal of Monetary Economics 12, 383–398.CrossRefGoogle Scholar
Clarida, Richard, Gali, Jordi, and Gertler, Mark (2002) A simple framework for international monetary policy analysis. Journal of Monetary Economics 49, 879–904.CrossRefGoogle Scholar
Corsetti, Giancarlo and Pesenti, Paolo (2005) International dimensions of optimal monetary policy. Journal of Monetary Economics 52, 281–305.CrossRefGoogle Scholar
De Paoli, Bianca (2009a) Monetary policy and welfare in a small open economy. Journal of International Economics 77, 11–22.CrossRefGoogle Scholar
De Paoli, Bianca (2009b) Monetary policy under alternative asset market structures: The case of a small open economy. Journal of Money, Credit and Banking 41, 1301–1330.CrossRefGoogle Scholar
Devereux, Michael B. and Engel, Charles (2003) Monetary policy in the open economy revisited: Price setting and exchange-rate flexibility. Review of Economic Studies 70, 765–783.CrossRefGoogle Scholar
Devereux, Michael B. and Sutherland, Alan (2008) Financial globalization and monetary policy. Journal of Monetary Economics 55, 1363–1375.CrossRefGoogle Scholar
Devereux, Michael B. and Sutherland, Alan (2010) Country portfolio dynamics. Journal of Economic Dynamics and Control 34, 1325–1342.CrossRefGoogle Scholar
Devereux, Michael B. and Sutherland, Alan (2011) Country portfolios in open economy macro models. Journal of the European Economic Association, 9, 337–369.Google Scholar
Faia, Ester and Monacelli, Tommaso (2008). Optimal monetary policy in a small open economy with home bias. Journal of Money, Credit and Banking 40, 721–750.CrossRefGoogle Scholar
Gali, Jordi and Monacelli, Tommaso (2005) Monetary policy and exchange rate volatility in a small open economy. Review of Economic Studies 72, 707–734.CrossRefGoogle Scholar
Kollmann, Robert (2002) Monetary policy rules in the open economy: Effects on welfare and business cycles. Journal of Monetary Economics 49, 989–1015.CrossRefGoogle Scholar
Obstfeld, Maurice and Rogoff, Kenneth (1995) Exchange rate dynamics redux. Journal of Political Economy 103, 624–660.CrossRefGoogle Scholar
Pappa, Evi (2004) Should the Fed and the ECB cooperate? Optimal monetary policy in a two-country world. Journal of Monetary Economics 51, 753–779.CrossRefGoogle Scholar
Schmitt-Grohé, Stephanie and Uribe, Martin (2003) Anticipated Ramsey Reforms and the Uniform Taxation Principle: The Role of International Financial Markets. ECB working paper series 210.Google Scholar
Senay, Ozge and Sutherland, Alan (2007) Optimal monetary policy and the timing of asset trade in open economies. Economics Letters 95, 297–302.CrossRefGoogle Scholar
Tille, Cedric and van Wincoop, Eric (2010) International capital flows. Journal of International Economics 80, 157–175.CrossRefGoogle Scholar
Wagner, Wolf (2007) International risk sharing and governmental moral hazard. Open Economies Review 18, 577–598.CrossRefGoogle Scholar
Woodford, Michael (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar