Working Paper: CEPR ID: DP9087
Authors: Tommaso Monacelli
Abstract: Openness per se requires optimal monetary policy to deviate from the canonical closed-economy principle of domestic price stability, even if domestic prices are the only ones to be sticky. I review this argument using a simple partial equilibrium analysis in an economy that trades in final consumption goods. I then extend the standard open economy New Keynesian model to include imported inputs of production. Production openness strengthens even further the incentive for the policymaker to deviate from strict domestic price stability. With both consumption and production openness variations in the world price of food and in the world price of imported oil act as exogenous cost-push factors.
Keywords: Consumption; Imports; Exchange Rate; Imported Inputs; Monetary Policy; Openness; Trade
JEL Codes: E52; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| openness (O36) | optimal monetary policy deviation from domestic price stability (E63) |
| openness (O36) | effectiveness of monetary policy (E52) |
| world prices of food and imported oil (Q31) | monetary policy effectiveness (E52) |
| openness (O36) | flexible monetary policy (E63) |
| international relative prices (F31) | optimal policy response (E63) |
| consumption openness (F62) | monetary policy outcomes (E52) |
| production openness (L17) | monetary policy outcomes (E52) |