Exchange Rate Targeting in a Small Open Economy

Number: 
367
Published: 
Classification JEL: 
E52, F41
Keywords: 
Human capital agglomeration, Social returns, Private returns, Externalities, Uncertainty, Fiscal policy

The paper develops a New Keynesian Small Open Economy Model characterized by external habit formation and Calvo price setting with dynamic inflation updating. The model is used to analyze the effect of nominal ex-change rate targeting on optimal policy an