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- Title
Inspecting Monetary Policy Rules in a Small Open Economy with Financial Frictions.
- Authors
Yongseung Jung
- Abstract
In this paper, we address how the monetary authority should react to financial market status and exchange rate movements in a small open economy New Keynesian model with financial frictions due to asymmetric information between savers and borrowers. We show that the small economy with financial frictions is more susceptible to the exogenous shocks under the fixed exchange rate regime than under the flexible exchange regime. The small economy experiences a more prolonged and deeper economic recession under the fixed exchange rate regime than under the flexible exchange rate regime. The monetary policy taking into account external finance premium is better than the interest rate rule without considering the financial market status.
- Subjects
MONETARY policy; FREE trade; FOREIGN exchange rates; INTEREST rates; FINANCIAL market reaction; FRICTION; FINANCIAL markets
- Publication
East Asian Economic Review (EAER), 2023, Vol 27, Issue 2, p115
- ISSN
2508-1640
- Publication type
Article
- DOI
10.11644/KIEP.EAER.2023.27.2.420