The timing of asset trade and optimal policy in dynamic open economies
Date
12/2013Grant ID
RES-156-25-0027
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Abstract
Using a standard open economy DSGE model, it is shown that the timing of asset trade relative to policy decisions has a potentially important impact on the welfare evaluation of monetary policy at the individual country level. If asset trade in the initial period takes place before the announcement of policy, a national policymaker can choose a policy rule which reduces the work effort of households in the policymaker’s country in the knowledge that consumption is fully insured by optimally chosen international portfolio positions. But if asset trade takes place after the policy announcement, this insurance is absent and households in the policymaker’s country bear the full consumption consequences of the chosen policy rule. The welfare incentives faced by national policymakers are very different between the two cases. Numerical examples confirm that asset market timing has a significant impact on the optimal policy rule.
Citation
Senay , O & Sutherland , A 2013 , ' The timing of asset trade and optimal policy in dynamic open economies ' , Macroeconomic Dynamics , vol. 17 , no. 8 , pp. 1543-1573 . https://doi.org/10.1017/S1365100512000211
Publication
Macroeconomic Dynamics
Status
Peer reviewed
ISSN
1365-1005Type
Journal article
Rights
This is the author's version of this work. The published version copyright (c) Cambridge University Press 2013 is available from http://journals.cambridge.org
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