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Monetary policy and noise traders: A welfare analysis

Lookup NU author(s): Dr Jong ShinORCiD

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Abstract

This paper studies the choice of monetary policy regime in a small open economy with noise traders in forex markets. We focus on two simple rules: fixed exchange rates and inflation targeting. We contrast the above two rules against optimal policy with commitment under productivity shocks. In general, the presence of noise traders increases the desirability of a fixed exchange rate regime. We also evaluate the welfare impact of Tobin taxes in this milieu. These taxes help unambiguously in the absence of productivity shocks; their welfare impact under productivity shocks depends on the monetary regime in place and trade elasticity between domestic and foreign goods.

Publication metadata

Author(s): Shin J, Subramanian C

Publication type: Article

Publication status: Published

Journal: Journal of Macroeconomics

Year: 2016

Volume: 49

Pages: 33-45

Print publication date: 01/09/2016

Online publication date: 13/05/2016

Acceptance date: 11/05/2016

Date deposited: 08/06/2016

ISSN (print): 0164-0704

ISSN (electronic): 1873-152X

Publisher: Elsevier

URL: http://dx.doi.org/10.1016/j.jmacro.2016.05.002

DOI: 10.1016/j.jmacro.2016.05.002

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