Three Essays on Monetary Policy in Small Open and Developing Economies

This dissertation consists of three essays organized as chapters. On the first chapter, I revisit the discussions which evaluate different fluctuations of major economic variables produced by different monetary policy rules for small open economies, given the existence of liability dollarization. In particular, monetary rules which either include or exclude exchange rate stability as a monetary policy objective. I extend these argument by adding shocks to the risk premium for foreign borrowing to a calibrated small open economy DSGE model with sticky prices and monopolistic competition in the intermediate goods market. In addition I consider two monetary policy rules; one which put high weight on real exchange rate stability, and one which puts low weight on real exchange rate stability. With this model, I analyse the fluctuations of major macroeconomic variables under these two rules. It is found that there are variations in the fluctuations of the economic variables under these rules. In particular it is found that for risk premium shock, higher weights on real exchange rate stability in the monetary policy rule, amplifies the response of the macroeconomic variables. On the second chapter, I extend the model of the first paper by computing the optimal monetary policy rule under liability dollarization and given risk premium shocks. In this chapter I also consider three monetary policy rules; one which put high weight on real exchange rate stability, and one which puts low weight on real exchange rate stability and the optimal monetary policy rule, and analyse the fluctuations of major macroeconomic variables under these three rules. It is found that for risk premium shocks, higher weights