A Welfare Evaluation of East Asian Monetary Policy Regimes under Foreign Output Shock
Adverse foreign output shocks have a sizable impact on the welfare of small open economies. Therefore, one of the key roles of monetary policy in those economies is to minimize the welfare losses arising from such shocks.
Joseph D. Alba, Wai-Mun Chia, and Donghyun Park assess the welfare impact of external shocks under different monetary policy regimes in East and Southeast Asia. To do so, they numerically solve and calculate the welfare loss function of a dynamic stochastic general equilibrium (DSGE) model with complete exchange rate pass through. Their DSGE model simulation results suggest that consumer price index inflation targeting delivers the least welfare losses for most small open economies in East and Southeast Asia.
- Role of Monetary and Exchange Rate Policies in Cushioning External Shocks
- The Model
- Simulation Results and Welfare