The paper extends previous analysis of closed-economy inflation targeting to a small open economy with forward-looking aggregate supply and demand with some microfoundations, and with stylized realistic lags in the different transmission channels for monetary policy. The paper compares targeting

in open economies

January 1998. I am grateful for research assistance from Qiming Chen,

Abstract Since the 1995 publication of Obsteld and Rogoff's Redux model, there has been an outpouring of research on open-economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities. This paper offers an interim survey of this recent literature.

We lay out a small open economy version of the Calvo sticky price model, and show how the equilibrium dynamics can be reduced to a tractable canonical system in domestic inflation and the output gap. We employ this framework to analyze the macroeconomic implications of three alternative rule

open versus the closed economy? Is “potential GDP ” a function of global developments, or only of domestic resources available and domestic pro-ductivity? Perhaps most important, how—if at all—does openness influ-ence the optimalmonetary policy rule? Is a Taylor rule the rightmonetary policy

This paper extends the savers-spenders theory of Mankiw (2000) to analyze fiscal policy in a small open economy with endogenous labor supply. It is first shown that tax cuts have a shortrun contractionary effect on domestic production, and increased public spending has a short-run expansionary

This paper studies the conditions under which price stability is the optimal policy in a two-country open-economy model with imperfect competition and price stickiness. Special conditions on the levels of country-specific distortionary taxation and the intratemporal and intertemporal elasticities

What policy rules should central banks follow? A growing number of econo-mists and policymakers advocate targets for the level of inflation. Many also argue that inflation targeting should be implemented through a “Taylor rule” in which interest rates are adjusted in response to output and inflation. These

An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePEc.org • from the CESifo website: Twww.CESifo-group.deT