Monetary Policy Constraints in an Small Open and Dollarized Economy

Monetary policy in small open and dollarized economies is forcing central banks to use currency policy and exchange policy to influence total interest rates and internal credit in the short term. [1] Nonetheless, in small open economies, efficiency of these tools is limited by world market decisions on interest rates. In many small countries, fixed exchange rate policy is adopted to suppress inflation and increase stability. This policy restricts the use of currency products, thereby increasing the total production, as changes in money supply depend on the determined exchange rate.

This course covers open economy macroeconomics. Topics include international balance of payments accounting, exchange rate decisions, financial and fiscal policies, and macroeconomic models. After studying standard theories and models, the course will explore recent case case studies in many countries. Case studies will focus on debt and balance of payments crisis, speculative currency attack, European currency alliance, IMF policy, and dollar value. Students will participate in research projects. Prerequisite: ECO 110-111 and entry / advanced degree. (Usually once a year)

China's open market policy, financial and fiscal policies have had a major impact on international trade, investment and human resources in the regional economy and the world economy. Through open markets and monetary policy, multinational companies and foreign companies began importing materials and products from China. The exchange rate of the Renminbi is lower due to the application of China's monetary policy, but China's exports are also lower. Most countries like the United States are very excited. On the other hand, countries such as Japan are benefiting from the implementation of open market policies, and Japan and other countries are trying to import materials at lower prices than other suppliers. The open market policy has an influence on the human resources of the world economy and the population of China is rapidly increasing, so in countries where investment is desired, labor costs tend to be lower and head towards China.

The optimal monetary policy in international economics focuses on how to implement monetary policy in an interdependent open economy. In a classic view, the interdependence of the international macroeconomy is relevant only when it affects the domestic output gap and inflation, and the prescription of monetary policy can be abstracted from openness without damage . This viewpoint is based on two implicit premises. It is a friction-free international financial market that supports high reactivity of import price to exchange rate, namely producer currency pricing (PCP) and flexible price allocation efficiency. Violations and distortions of these assumptions found in empirical studies account for the majority of literature on international best monetary policy. There are three aspects to policy trade-offs specific to this international perspective.