From a theoretical point of view and as we will show the presence of both price and wage rigidities implies that to the extent that fiscal policy is unresponsive to shocks full price stability is not optimal. In this paper we study optimal monetary and exchange rate policy in a small open economy with both types of rigidity following a shock to the price of an exportable commodity. This paper is part of a research project that is motivated by the experiences of many small open economies that in the last two decades became—very effectively!—inflation targeters. Many of these economies are commodity producers and the size of the commodity sector to GDP is very high.
Attribution-NonCommercial-NoDerivs 3.0 Chile
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