Monetary policy conduct: A hybrid framework

Mohamed Douch and Naceur Essadam

¹Politics and Economics Department, Royal Military College of Canada, P. O. Box 17000 Stn. Forces Kingston, Ontario, Canada.

²Business Administration Department, Royal Military College of Canada, P. O. Box 17000 Stn. Forces Kingston, Ontario, Canada.

*Corresponding author. E-mail: Douch-m@rmc.ca.  Tel: 1-613-541-6000.

Accepted 10 June 2010

 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.