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A Poole Analysis in the New Open Economy Macroeconomic Framework *
Author(s) -
Hoffmann Mathias,
Kempa Bernd
Publication year - 2009
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2009.00810.x
Subject(s) - economics , small open economy , money supply , open economy , welfare , monetary policy , interest rate , economy , monetary economics , macroeconomics , market liquidity , exchange rate , market economy
This paper evaluates simple monetary policy rules in the tradition of the Poole analysis within a general two‐country model for a large economy and a small open economy. The results for the large economy resemble those of the original Poole scenario and also extend to the welfare measure. In particular, an interest rate rule is preferable to a money supply rule when liquidity shocks dominate, whereas a money supply rule fares better with real shocks. For the small open economy, the stabilization properties of the large‐economy case continue to hold for domestic shocks, but a money supply rule performs better than an interest rate rule using the welfare measure. If shocks originate in the foreign economy, a money supply rule turns out to be superior both in terms of its stabilization properties as well as in terms of welfare.