A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence

Abstract

Monetary policy regime combinations are compared for symmetric and asymmetric temporary shocks to money demand, goods demand, and productivity. In every region, the interest-rate instrument is either kept constant or changed to eliminate (full instrument adjustment) or reduce (partial instrument adjustment) the gap between actual and desired values for an intermediate target: the money supply, nominal income, or output plus inflation. Nominal wage persistence may be absent (Contract hypothesis) or present (Phillips hypothesis and Taylor hypothesis). There are analytical and simulation results from a two-region workhorse model and simulation results from the McKibbin-Sachs Global model. The ranking of regime combinations depends not only on the ultimate target and the source of shocks but also on the degrees of instrument adjustment and wage persistence.