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Monetary policy under alternative asset market structures: the case of a small open economy

By Bianca De Paoli

Abstract

Can the structure of asset markets change the way monetary policy should be conducted? Following a linear-quadratic approach, the present paper addresses this question in a New Keynesian small open economy framework. Our results reveal that the configuration of asset markets significantly affects optimal monetary policy and the performance of standard policy rules. In particular, when comparing complete and incomplete markets, the ranking of policy rules is entirely reversed, and so are the policy prescriptions regarding the optimal level of exchange rate volatility

Topics: HG Finance, HB Economic Theory, HD Industries. Land use. Labor
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Year: 2009
OAI identifier: oai:eprints.lse.ac.uk:28595
Provided by: LSE Research Online

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