Abstract

This paper examines whether a small-open-economy, DSGE-based, New-Keynesian model can provide a natural framework for monetary policy conduct with the use of a hybrid monetary-policy regime. Allowing for some inflation inertia, a small-open-economy version of the Calvo sticky-price model to investigate hybrid inflation/price-level targeting was developed. This paper explores the proprieties of monetary policy in terms of Taylor interest-rate rules and conduct welfare analysis on various specifications. The study’s analyses show that hybrid targeting outperforms other specifications and produces quantitatively good results by lowering output and inflation variabilities when compared to regimes targeting the price levels or the inflation rate.

Key words: Small-open economy, monetary policy, hybrid targeting.