In this paper the optimal choice of a monetary target is investigated for a small open economy that is subject to foreign monetary policy shocks. In contrast to large parts of the literature, pegging the exchange rate is never the best policy choice for the small open economy in our model. Instead, monetary targeting and, depending on the parameter combination, producer price index targeting co...

Over the last couple of weeks in lectures, we have considered optimal monetary policy in the baseline model and in models with extensions. Professor Gali provided an empirical overview of monetary policy rules in di¤erent periods, for example the US experience preand post-Volcker. In the context of cost-push shocks, we discussed monetary policy with and without commitment. This recitation hando...