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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 18, No. 2, pp.147-172
ISSN: 1225-0279 (Print)
Print publication date 31 May 2005
Received 19 Jan 2005 Revised 23 Apr 2005

The Performance of Targeting Monetary Policies in a Small Open Economy

Kwanghee Nam
Assistant Professor, School of Economics, Kookmin University, Seoul 136-702, Korea, Tel: +82-2-910-4523, Fax: +82-2-910-4519 knam@kookmin.ac.kr

JEL Classification: E52, E54

Abstract

This paper examines the performance of targeting monetary policies in a dynamic optimizing model. Towards this end I develop a small open economy version of the New Keynesian model and calibrate it to the recent Korean data. By modeling the central bank as an optimizing agent with explicit weights on different components of the objective function, I explore the consequences of alternative specifications of the central bank's objectives. Policy simulations include variations on inflation targeting, nominal income growth targeting and exchange rate targeting. Simulation results suggest that inflation targeting is preferable to nominal income growth and exchange rate pegging in smoothing out fluctuations in inflation and the output-gap.

Keywords:

Targeting monetary policy, Inflation targeting

Acknowledgments

I wish to thank anoymous referees for their helpful comments and acknowledge the financial support from Kookmin University. All remaining errors are mine.

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