International Trade Fluctuations and Monetary Policy

24 Pages Posted: 8 Sep 2015 Last revised: 10 Sep 2015

See all articles by Fernando Leibovici

Fernando Leibovici

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Ana Maria Santacreu

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: September 8, 2015

Abstract

This paper studies the role of trade openness for the design of monetary policy. We extend a standard small open economy model of monetary policy to capture cyclical fluctuations of international trade flows, and parametrize it to match key features of the data. We find that accounting for trade fluctuations matters for monetary policy: when the monetary authority follows a Taylor rule, inflation and the output gap are more volatile. Moreover, we find that the volatility of these variables is significantly higher when the central bank follows the optimal policy based on a model that cannot account for international trade fluctuations.

Suggested Citation

Leibovici, Fernando and Santacreu, Ana Maria Maria, International Trade Fluctuations and Monetary Policy (September 8, 2015). Available at SSRN: https://ssrn.com/abstract=2657467 or http://dx.doi.org/10.2139/ssrn.2657467

Fernando Leibovici (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Ana Maria Maria Santacreu

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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