The Korean Economic Review
Relative Price Distortion and Optimal Monetary Policy in Open Economies
Jinill Kim, Andreu T. Levin, Tack YunYear 2008Vol. 24No. 1
This paper provides a closed-form solution for optimal monetary policy in a two-country model with Calvo-type sticky prices. Initial price dispersion makes it suboptimal to completely stabilize the producer price index, and the optimal policy would entail a price-level targeting. The solution also indicates that the isomorphism of optimal policy rules between closed and open economy breaks down unless the utility function is logarithmic in consumption.