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This paper studies optimal monetary policy in a two-sector small open economy model under segmented asset markets and sticky prices. We solve the Ramsey problem under full commitment, and characterize the optimal monetary policy in a calibrated version of the model. The findings of the paper are threefold. First, the Ramsey solution mimics the allocations under flexible prices. Second, under the optimal policy the volatility of non-tradable inflation is close to zero. Third, stabilizing nontradable inflation is optimal regardless of the financial structure of the small open economy. Even for a moderate degree of price stickiness, implementing a monetary policy that mitigates asset market segmentation is highly distortionary. This last result suggests that policymakers should resort to other policy instruments in order to correct financial imperfections.

Finance: General --- Inflation --- Macroeconomics --- Financial Markets and the Macroeconomy --- Monetary Policy --- Open Economy Macroeconomics --- Price Level --- Deflation --- General Financial Markets: General (includes Measurement and Data) --- Macroeconomics: Consumption --- Saving --- Wealth --- Finance --- Sticky prices --- Securities markets --- Consumption --- Asset prices --- Prices --- Financial markets --- National accounts --- Capital market --- Economics --- Chile

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In this paper, we analyze how lack of credibility and transparency of monetary and fiscal policies undermines the effectiveness of macroeconomic policies to isolate the economy from commodity price fluctuations. We develop a general equilibrium model for a commodity-exporting economy where macro policies are conducted through rules. We show that the responses of output, aggregate demand, and inflation to an increase in commodity price are magnified when these rules are imperfectly credible and lack transparency. If policies are imperfectly credible, then transparency helps private agents to learn the systematic behavior of the authorities, reducing the effects of commodity prices shocks. Coherent with the model, we show cross-country evidence that monetary policy transparency and fiscal credibility reduce the incidence of export price volatility on output volatility. Also, our results indicate that having an explicit fiscal rule and an inflation targeting regime contribute to isolate the economy from terms of trade fluctuations.

Commodity control. --- International commodity control --- Commercial policy --- Cartels --- Producers' associations --- Inflation --- Macroeconomics --- Public Finance --- Monetary Policy --- Central Banks and Their Policies --- Policy Objectives --- Policy Designs and Consistency --- Policy Coordination --- Fiscal Policies and Behavior of Economic Agents: General --- Commodity Markets --- Fiscal Policy --- Price Level --- Deflation --- Macroeconomics: Consumption --- Saving --- Wealth --- Commodity price shocks --- Fiscal policy --- Commodity price fluctuations --- Consumption --- Prices --- National accounts --- Economics --- United States

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We study the use of foreign exchange (FX) intervention as an additional policy instrument in an environment with learning, where agents infer the central bank policy rules from its policy actions. Under full information, a central bank focused on stabilizing output and inflation can achieve better outcomes by using FX intervention as an additional policy tool. Under policy uncertainty, where agents perceive that monetary policy may also have exchange rate stabilization goals, the use of FX intervention entails a trade-off, reducing output volatility while increasing inflation volatility. While having an additional policy tool is always beneficial, we find that the optimal magnitude of intervention is higher in monetary policy regimes with lower uncertainty. These results indicate that the benefits of using FX intervention as an additional stabilization tool are greater in regimes where monetary policy is credibly focused on output and inflation stabilization.

Banks and Banking --- Exports and Imports --- Foreign Exchange --- Inflation --- Central Banks and Their Policies --- Open Economy Macroeconomics --- Price Level --- Deflation --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- International Investment --- Long-term Capital Movements --- Currency --- Foreign exchange --- Macroeconomics --- Banking --- International economics --- Exchange rates --- Capital inflows --- Prices --- Banks and banking --- Capital movements