Welfare-based evalution of alternative loss functions for small open economies

Date

2009

Editor(s)

Advisor

Gürkaynak, Refet S.

Supervisor

Co-Advisor

Co-Supervisor

Instructor

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Abstract

This master’s thesis compares outcomes of alternative loss functions to optimal monetary policy in small open economies as the degree of openness increases. The small open economy model that is laid out by Gali and Monacelli (2005) is taken as the baseline framework. Based on a second order Taylor approximation to the utility function, the optimal monetary policy is derived. Then, using the optimal policy as a benchmark, four alternative loss functions are evaluated. Among others, minimizing the variance of domestic inflation achieves the minimum loss and is equivalent to optimal policy. Minimization of CPI inflation variance gives higher losses compared to minimization of domestic inflation variance. Lastly, attributing positive weight to dampening exchange rate fluctuations increases welfare losses.

Source Title

Publisher

Course

Other identifiers

Book Title

Degree Discipline

Economics

Degree Level

Master's

Degree Name

MA (Master of Arts)

Citation

Published Version (Please cite this version)

Language

English

Type