Effectiveness of Monetary Policy Reconsidered

This paper inspects the standard policy rule that under a flexible exchange rate regime with perfectly elastic capital flows, monetary policy is effective and fiscal policy is not. The logical validity of the statement requires that the effect of an exchange rate change on the domestic price level be ignored. The price level effect is noted in some textbooks, but not formally analyzed. When it is subjected to a rigorous analysis, the interaction between changes in the exchange rate and the domestic price level significantly alters the standard policy rule. The logically correct statement would be, under a flexible exchange rate regime with perfectly elastic capital flows the effectiveness of monetary policy depends on the values of the import share and the sum of the trade elasticities. Inspection of data from developing countries indicates the effectiveness of monetary policy under flexible exchange rates can be quite low even if capital flows are perfectly elastic.

Public infrastructures, public consumption and welfare in a new open economy macro model

This paper focuses on the trade-off faced by governments in deciding the allocation of public expenditures between productivity-enhancing public infrastructures and utility-enhancing public consumption in a two-country model. The results show that a permanent increase in the domestic stock of public capital financed by a reduction in public consumption raises domestic welfare if the productivity of public capital is high and the weight of public consumption in private utility is low compared with private consumption. The effect on foreign welfare is negative in the short run, but positive in the long run. This implies that, if foreign authorities care not only about the present discounted value of welfare but also about welfare dynamics, a permanent domestic reallocation of public spending might result in a virtuous global technological cycle.public spending composition; welfare; imperfect competition; nominal rigidities

On the Origins of the Fleming-Mundell Model

Forty years ago, Marcus Fleming and Robert Mundell developed independent models of macroeconomic policy in open economies. Why do we link the two, and why do we call the result the Mundell-Fleming, rather than Fleming-Mundell model? Copyright 2003, International Monetary Fund

A bibliometric review of the research papers of the Central Bank of Turkey

This paper presents a bibliometric assessment of the research papers produced in the Central Bank of the Republic of Turkey from 1988 to 2009. Concentration over subjects and the Journal of Economic Literature (JEL) classification codes are provided in addition to the time distribution of bibliography cited in the research papers. Overall, it is observed that the examined series did provide an adequate pool of knowledge for both academics and the general public.Bibliometrics; Central bank research; Economic research

Tariff and Equilibrium Indeterminacy--(II)

We establish conditions under which indeterminacy can occur in a small open economy oil-in the production RBC model with lump sum tariff revenue transfers. The indeterminacy would require that the steady state tariff rates be in an open interval. This means that as long as the government revenues are exogenous, our indeterminacy result will be robust to the usage of the government revenue.Indeterminacy; Endogenous Tariff Rate; Small Open Economy; Lump Sum Transfers

Openness, the Phillips Curve and the Cost of Relinquishing the Currency

For a given degree of wage stickiness, there is an inverse relationship between the price-level and employment effects of a nominal shock. Various contributors to the literature on optimal currency areas have extrapolated from this to argue that the real effects of exchange rate changes are smaller for more open economies, reducing the effectiveness of the exchange rate as a macroeconomic instrument. This would imply that more open economies face steeper Phillips curve trade-offs. This proposition has been challenged empirically however. This paper employs standard small-open-economy models to analyse these issues. The propositions are shown to be correct when the non-traded sector is monopolistically competitive. Whether they are true or false under competitive conditions depends on a simple condition that may or may not be satisfied in practice.Openness, Phillips curve, Optimal currency area

AN ANALYSIS OF DOMESTIC AND EXTERNAL SHOCKS ON ROMANIAN ECONOMY USING A DSGE MODEL

In this paper, I study the impact of the domestic and external shocks on the Romanian economy. I use an open economy DSGE model and estimate it for the Romanian economy using Bayesian techniques. The impact of the domestic shocks is moderate but not persistent. The Euro Area demand and interest rate shocks have a moderate impact on the domestic output. The Euro Area supply and interest rate shocks have significant and persistent impacts on the domestic inflation. I also perform a long-run variance decomposition of the domestic variables.DSGE models, small open economy, Romania, Euro Area, monetary policy.

Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics

The New Open Economy Macroeconomics has allowed economists to tackle classical problems with new tools, while also generating new ideas and questions. In their attempts to make the new models capture empirical regularities, researchers have entertained a variety of assumptions about the international pricing of goods, notably, models of pricing to market and destination-currency pricing of exports. Some of the resulting models imply that exchange-rate changes lack international expenditure-switching effects, and they thus appear to call for a radical rethinking of the role of exchange rates in international adjustment. This paper argues that the recent resurgence of exchange-rate pessimism stems from oversimplified modeling strategies rather than from evidence. Like earlier episodes starting with the extreme 'elasticity pessimism' of the early postwar era, it is based on a misinterpretation of the empirical record.