Many of the advances in monetary policy analysis over the past two decades have been developed from the perspective of a large open economy. The early theoretical work on the New Keynesian model frequently ignored exchange rates, ﬁnancial capital ﬂows, and trade ﬂows. This neglect carried over into the ﬁrst generation of DSGE models that were taken to the data and used for policy experiments. When open-economy versions of New Keynesian models were developed, they generally assumed perfect capital mobility and uncovered interest parity.
While these assumptions allowed the models to address some issues relevant for open economies, they were often not well suited for investigating policy issues in small open economies where ﬁnancial markets were not fully integrated into world capital markets, and where domestic ﬁnancial markets were underdeveloped. Standard models also restricted attention to interest rates as the sole instrument of monetary policy, ignoring the role that exchange rate controls, monetary aggrates, and required reserve ratios play as policy instruments in many emerging-market economies.
See the March issue of the International Journal of Central Banking:
About the IJCB:
The International Journal of Central Banking (IJCB) is an initiative of the central banking community. Published quarterly, the journal features articles on central bank theory and practice, with a special emphasis on research relating to monetary and financial stability. The main objectives of the International Journal of Central Banking are:
-to disseminate widely the best policy-relevant and applied research that reflects the missions of central banks around the world across a range of disciplines; and
-to promote communication amongst researchers both inside and outside of central banks.
The journal’s sponsoring institutions are committed to ensuring that the IJCB offers articles of high analytical quality for a professional audience. Both central bank and non-central bank economists are invited to submit papers for consideration.