Galí, Jordi, 1961-Monacelli, TommasoUniversitat Pompeu Fabra. Departament d'Economia i Empresa2017-07-262017-07-262004-07-01Review of Economic Studies, 72, 707-734, 2005http://hdl.handle.net/10230/888We lay out a small open economy version of the Calvo sticky price model, and show how the equilibrium dynamics can be reduced to simple representation in domestic inflation and the output gap. We use the resulting framework to analyze the macroeconomic implications of three alternative rule-based policy regimes for the small open economy: domestic inflation and CPI-based Taylor rules, and an exchange rate peg. We show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail. We also discuss a special case for which domestic inflation targeting constitutes the optimal policy, and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules.application/pdfengL'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commonsinfo:eu-repo/semantics/workingPapersmall open economyoptimal monetary policysticky pricesexchange rate pegexchange rate volatilityMacroeconomics and International Economicsinfo:eu-repo/semantics/openAccess