Monetary policy in illiquid markets: Options for a small open economy

Edda Claus, Renee Fry, Mardi Dungey

    Research output: Contribution to journalArticle

    Abstract

    Two impediments to effective monetary policy operation include illiquidity in bond markets and the zero bound of interest rates. Under these conditions alternative means of enacting monetary policy may be required. This paper empirically explores policy options implemented through equity and currency markets that will generate similar inflation responses at different time horizons. In terms of GDP loss the least costly means of achieving a particular long run inflation outcome is via the current monetary policy arrangements. Currency market alternatives are volatile but less expensive than the equity market in terms of output loss for short term inflation horizons.
    Original languageEnglish
    Pages (from-to)305-336
    JournalOpen Economies Review
    Volume19
    Issue number3
    Publication statusPublished - 2008

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